Leverage is a technique involving the borrowed funds. Leverage is like you can borrow funds from others to purchase an asset to save your opportunity cost. Opportunity cost means you are already invested some when but along with that, you found one new opportunity to invest. But how will you manage to invest? so with the help of leverage, you can able to manage it.
As we say, there are two sides of the coin, same way leverage also has two sides. I.e. good and bad. The good side is like you can save your opportunity cost and you can purchase an asset. But on the bad side, there is the possibility that you can wipe your self out from the market because of over-leverage. For eg,
Let’s talk about LTCM (Long Term Capital Management) company. They have a total capital of 129$ billion but from that their own capital is only 4$ billion and their borrowed money is 125$ billion.
Their strategy is like they have invested in the worldwide bond market. They are buying cheap bonds and selling the costlier bonds. They found that this strategy is a sure shot. As they never thought for the reverse of their strategy.
So during this sure shot strategy, they thought why they should take this much small profits for eg. if they have 100 rs cap. and they earn 2rs. So that’s why they thought for bigger profits. But for that, they need more money, and they have taken leverage and as they have started earning more and more they have taken more and more leverage.
And once, they become bigger than the market as their position becomes 1.25 trillion emotional, which is equal to 5% of the whole global market. It had become a major supplier of volatility in the global market.
But to throw them out from the market, there is one day is sufficient i.e. they are working on diversion like from the top they sell and from the bottom they buy. They thought this gap will cover in few years.
But after some time this gap become major gap and they wiped out from the market. As their strategy was right i.e. difference covered but after few years. But till that, they were unable to hold their over-leveraged position.
So this is the biggest example of how leverage throws them out from the market. Same way there is another example of the biggest trader Niederhoffer. Who, was also thrown out by the market because of leverage.
Let see what happen with Niederhoffer. As he had a loss in bath crises (Thailand currency). So to cover this loss he has started investing in S&P market. As he has started short selling of 800 pt @ 2.80 and as S&P market increases his put starts falling till 0.60 – 0.70. At that time he was in massive profits. But as always history repeats the same thing happen here also. On 23rd Oct. S&P market falls and his option increased to 1.20. After few days again S&P falls 7% and his option increased to 16$. So on Tuesday mid-morning, his broker has started cutting his all the positions and his a/c closed with -20$ mn.
But here the main thing is, that option expired on 0$ on the expiry date. So his strategy was not bad but his over-leveraged positions have finished him in the market.
So with the help of this two big examples of leverage, you can realize that how leverage can throw you out from the market.
So that’s why leverage is a good thing but until you manage it. So if you go over leveraged then you will not be able to survive longer in the stock market.
And in the market, before getting successful you have to sustain yourself for a long time in this stock market. If you sustain for a long time in this market. Then only you can able to understand that what are the things important to become successful trader/investor.
So to solve this biggest problem of traders/investors Niftymillionaire has taken a step ahead with the help of First time in India, Personalized Risk and Money management system Profitgyan.
As we know Profitgyan is a system which is the mixture of Risk management and Money management. ProfitGyan can help you to manage your capital and risk. It will guide you as how much quantity you should take, and according to your quantity, how much risk you should take?
Retail trader/investors are majorly driven by emotions. Our major decisions are taken as per our mood-swings. If we are much happy then will take huge quantity, and if we are sad then will trade with less no. of quantity. When we are in profits at that time only we have less quantity and when we are in loss, we have huge quantity.
For eg.: you have invested 1 lakh in the market and you face the loss of 20%
i.e. 1 lakh * 20% = 20k.
So after this loss, you have now only 80k in the market.
So if you want to reach again to 1 lakh that means to cover your loses, what do you think, how much you need to earn back?
No. Think if you earn 20% but now your capital is 80k and on 80k * 20% = 16000/- only.
Which does not give you 1 lakh, it is just 96k.
So for 1 lakh, you need to cover 25% then you will be able to cover your loss of 20% on 1 lakh.
This is how risk management is important. If you will not follow the risk management then your capital will be highly affected. That’s why NiftyMillionaire has launched this system Profitgyan. That will guide you as per your capacity of taking the risk in your capital.
So after this much of discussion, I hope you guys (traders/investors) are able to understand that why leverage is good but not for emotional driven trader/investor.
So what are you waiting for?
Don’t miss the chance, take the maximum advantage of this big opportunity (ProfitGyan).
It will help you to Control your Emotions, your Risk and your Capital in the Stock Market.
*Professional investors/trader on niftymillionaire platform is Bindul shah. (Sebi Registered) Sebi Registration : INH000003663 (Bindul shah Sebi Registration : INH000003663)