Leverage

Leverage is the use of borrowed capital or Margin to amplify the potential return (and risk) of an investment. When you trade with leverage, you control a position larger than your actual capital, magnifying both gains and losses proportionally.

In Indian markets, leverage is available through several mechanisms. For intraday equity trading, brokers offer leverage through the MIS (Margin Intraday Square-off) product type. SEBI's peak margin rules require that leverage be calculated based on VaR (Value at Risk) + ELM (Extreme Loss Margin) of the specific stock. High-liquidity stocks like Reliance or TCS might require 15–20% margin, offering effective leverage of 5–7x, while volatile small-caps might require 40–50% margin.

In the derivatives segment, leverage is inherent. A Nifty futures contract controlling approximately ₹10,00,000 worth of the Nifty 50 index requires only about ₹1,20,000–1,50,000 in margin — roughly 12–15% of the notional value. Options provide even higher effective leverage: buying a Nifty call Option might cost ₹5,000–10,000 in premium while controlling ₹10,00,000 in notional exposure.

The danger of leverage is that losses are amplified just as much as gains. If you take a 5x leveraged position and the stock moves 5% against you, you lose 25% of your capital. A 20% adverse move would wipe out your entire capital. This is why SEBI mandates Margin Call mechanisms — brokers must issue margin calls when the account value falls below maintenance margin levels, and can liquidate positions if the shortfall is not met.

Leverage is a tool, not a strategy. Professional traders use it to improve capital efficiency on high-conviction trades, always with strict stop-losses. Beginners should avoid leverage entirely until they have a proven track record of profitable unleveraged trading.