- Assume you have Rs. 10,000 in your trading account.
So when you want to buy (or short sell) a specific stock costing Rs.10 each, the computer does not automatically decide how many you can buy with 10,000.
You need to manually enter the quantity; say like QTY 1000 of share price 10 each = 10,000.
- Now, If you are planning to BUY the above shares and SELL it (or vice versa) on the same day, the broker provides a intraday facility called the LEVERAGE.
Different shares have different leverage rating based on risk.
Imagine the stock you decided to buy and sell has a leverage rating of 8x.
Now, using the above leverage facility from your broker, you can buy the same shares upto 8x more.
So, with a capital of Rs.10,000 and leveraging it 8x you can buy the same shares to a total value of Rs.80,000.
(80,000(leveraged capital) divide by Rs.10 each share = 8000 shares)
So with just Rs.10,000 in your account you have BOUGHT or SHORTSOLD 8000 shares worth Rs.80,000
- At the end of the day when the broker closes your position, your capital is adjusted only with the NET EFFECT OF YOUR TRADE and not the total value of the transaction
In the MORNING you have shortsold 8000 shares priced at RS.10 and in the EVENING when you have closed the position the shares have reduced in price to Rs.9
SHORTSOLD TOTAL VALUE in the morning= 80,000 (8000shares at Rs.10 each)
Evening buy back value = 72,000 (8000shares at Rs.9 each)
Net adjusted amount = 80,000 - 72,000 = 8000
The NET EFFECT OF Rs. 8,000 profit is added to your trading capital.