Glossary
Leverage
Using borrowed money or derivatives to control a larger position than your cash allows.
Simple explanation
Leverage multiplies both gains and losses by the same factor.
2x leverage means a 10% stock gain gives you 20% profit. But a 10% drop wipes 20% of your capital.
Futures, margin trading, and options all involve leverage.
In India, leverage is most commonly used in the F&O segment on NSE. When you buy a Nifty futures contract, you only need to put up around 10-12% of the contract value as margin (set by the exchange via SPAN margin). This means you are effectively using 8-10x leverage. A small move in Nifty translates to a much larger percentage move in your margin capital, both up and down.
SEBI has been steadily reducing the leverage available to Indian retail traders. Before 2021, some brokers offered 20-40x intraday leverage on stocks. After SEBI's peak margin rules, the maximum effective leverage dropped significantly. This was done because excessive leverage was the primary reason retail traders were blowing up their accounts. SEBI studies showed the average F&O trader lost ₹50,000 or more per year.
Options offer a unique form of leverage. When you buy a Nifty Call option for ₹200, you are controlling exposure to a Nifty move that could be worth ₹500-1,000. Your maximum loss is limited to ₹200 (the premium), but your upside can be 2-5x that amount. This asymmetric leverage is what makes options attractive to many Indian traders compared to futures, where losses are theoretically unlimited.
The golden rule of leverage is simple: never use leverage with money you cannot afford to lose entirely. Many Indian traders on Zerodha and other platforms make the mistake of using leverage on their entire savings. If you want to use leverage, allocate a separate 'risk capital' bucket, say 10-20% of your total wealth, and only use leverage within that bucket. This way, even a complete wipeout of your leveraged trades does not destroy your financial future.
Real-world example
Vijay has ₹2 Lakhs in his Zerodha trading account and buys 1 lot of Nifty futures at 22,000. The lot size is 25, so the contract value is ₹5.5 Lakhs, but he only needs about ₹1.1 Lakhs as margin, roughly 5x leverage. In one week, Nifty falls 3% to 21,340. His loss is ₹660 per unit × 25 = ₹16,500 on the position. But as a percentage of his ₹1.1 Lakh margin, that is a 15% loss from just a 3% market move. If Nifty had fallen 10% in a crash, he would lose ₹55,000, half his margin wiped out. His friend who bought a Nifty 22,000 Put option for ₹5,000 premium during the same crash made ₹25,000, a 5x return with only ₹5,000 at risk.
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