How you can buy more shares with your broker's credit line
₹1 lakh are tax-free. Brokers enforce risk-management practices, requiring investors to replenish their initial investment if the stock price drops below a certain threshold, usually 20-25%. If the investor fails to do so, the broker can sell the shares to recover the dues.
Let's consider a potential profit scenario: An investor sees an opportunity in the stock of XYZ Ltd., trading at ₹1,000. With ₹10,000 in their account, they can buy only 10 shares, but by borrowing an additional ₹30,000 through MTF at 14% interest, they can buy 40 shares. After holding the stock for 60 days, the price rises to ₹1,100.
The investor sells the 40 shares for ₹44,000. After accounting for the initial investment, borrowed funds, and interest cost, the profit is ₹3,310, or 33% on the initial ₹10,000 investment. But what if the stock price fell? In this case, selling at ₹900 yields ₹36,000, resulting in a loss of ₹4,690, or 46.9% on the initial investment.
In contrast, had the investor only bought 10 shares outright, the loss would have been limited to 10%. Using leverage to buy shares can be highly risky if the stock price starts to see significant correction. As shown in above example, your losses can magnify.
Also, there is an interest cost involved. The longer you hold your position, the higher will be the interest cost. So, long-term investors should avoid leveraged investing.
Instead, they can build their equity portfolio gradually with staggered investments. If you are first-time investor, it is advisable to avoid direct stock investing. Start building your investment portfolio through a diversified equity mutual fund.
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