Trading is a tricky thing. At first you are afraid to trade as you have the fear of losing money. But then once you start making profits, you gain confidence.
And in this confidence you start believing that you are invincible and no one can defeat you in the world of stock markets.
So, what you do next? In the greed of making more money you start taking huge leverage from the broker and start trading.
Well, you shouldn’t do that.
Not that I don’t want you to gain profits but trading on the leveraged amount poses a much higher risk. Let me explain how –
Suppose your trading amount is Rs 50,000. Your broker gives you a leverage of 5 times for a maximum of 5 days. After 5 days the broker will charge you 18% interest.
You start trading in the Stock Futures on the leverage given to you. You make handsome gains. In fact let’s say you turn Rs 2.5 lakhs (5x leverage) into Rs 3 lakhs.
But then one find day, let’s say you buy Stock Future whose Lot Size is 2,500. You bought the contract for Rs 300, 5 lots. In a couple of days let’s say your stock tanks 20% for some reason. And you end up losing (2500*3*60) Rs 450,000.
P.S. – Don’t think this can’t happen. It has happened in the past.
Result – You owe your broker Rs 150,000 (loss) + Rs 250,000 of exposure given to you + 18% interest if you miss deadline.
In order to avoid such a situation, putting your entire family in financial risk, it is better to trade with the capital you have rather than taking leverage. In a worst case scenario, you may lose your capital but at least you will learn something.
Losing on leverage will straight away cost you your assets you own.
Trading on leverage can take a toll on your lifetime’s savings and perhaps your assets. So it is better to be safe than sorry.