Introduction
With the best Demat account that a stockbroker can offer you, investors can use it as leverage to trade in the stock market, leading to a potential boost to one’s returns.
This kind of leverage helps investors achieve a larger position in the market with less investment.
When done right, leverage trading can be quite rewarding. However, it is always better to do all the homework that is needed to navigate through this journey profitably.
Leverage Trading
Leverage or margin trading helps investors borrow funds from their stockbroker to purchase shares or securities. This is done by leveraging the former’s investment capital.
With the help of leverage trading, investors, having purchased a higher value share, can control a larger position in the market, something they could not have achieved with their funds alone.
There are two sides to leverage trading, however. If the market moves in favour of the investor, they can make some serious gains, but if the market moves against them, then the investor can incur significant losses.
Derivative Trading
Indulging in derivative trading is another way to trade by using leverage through a Demat account. Derivative trading is trading through Futures and Options.
With the help of Futures and Options, investors can buy the underlying asset within a specific period at a predefined price.
As a result of this trade, investors can control a greater portion of the underlying security with little investment.
In derivative trading, the potential for returns is higher than the original investment.
However, one of the main risks of derivative trading is the loss of the entire investment if the derivatives expire before they can be sold.
How to use Demat Account for Leverage Trading
To understand more about how leverage trading works, below is an example
-
If an investor has ₹10,000 in their demat account, with the help of leverage trading, the stockbroker can help investors make a trade more than ten times that amount.
-
So, with the help of leverage trading, investors can borrow funds from the broker to invest in stocks.
-
The reason brokers offer funds to their clients is because they will earn more through transaction fees.
-
Usually, brokers charge transaction fees for both buying and selling shares.
Benefits of Using Leverage Trading in the Stock Market
Some of the main benefits of using leverage trading in the stock market are listed below:
-
Leverage trading helps increase the money available to the trader to invest. As a result, traders can invest in different positions and expand their portfolio.
-
With the help of leverage trading, investors also gain access to the more prestigious or expensive stocks that retail investors usually steer clear of. Some of these stocks or shares also have premium pricing. But with leverage trading, investors can purchase these stocks and open themselves up to the potential of making huge gains
-
With leverage trading, even if the underlying asset’s pricing moves minimally, the chances of making a significant profit exists
-
Since the profits are calculated on the trade position and not on the margin amount, there are still good returns possible.
Conclusion
Leverage to open a trading account can be a great way to utilize even the best Demat account to earn profits and establish a higher position for yourself in the market.
However, it is important to do your share of research, even with your stockbroker guiding you, so that you make informed investment decisions.
