# Leverage in Trading: 2.25 Crores in 8 minutes? Author: AlgoTest Author URL: https://algotest.in/blog/author/algotest/ Published: 2024-08-28 URL: https://algotest.in/blog/leverage-in-trading-2-25-crores-in-8-minutes/ If you’ve ever traded in the financial markets, chances are you've come across the term 'leverage'. In this blog, we’ll discuss what leverage is, how it is used and its dangers. Put simply, **_leverage is the use of borrowed funds to put on positions._** Many traders use leverage to increase the size of their position **_beyond what their trading account balance could furnish._** For example, say you'd like to purchase 100 shares of ITC intraday, whose last traded price (LTP) is say Rs. 200. The margin in your account needed to fund this would be 100 \* 200 = Rs. 20,000. However, the broker may provide leverage for intraday trades. For example, you may be allowed to put on this position with just Rs. 10,000, with the broker lending you the remaining Rs. 10,000. This is **_leverage_**. The broker has provided leverage of **_2:1_**; you have paid only Rs. 10,000 to control a position worth Rs. 20,000. Why would one use leverage? Using leverage can **_significantly enhance your ROI_** if the trades you placed end up in your favour. For instance, making Rs 100 on the ITC stock example from above equates to an ROI of 1% (100/10000) if leverage provided by the broker is utilised. However, if you were to pay the entire margin required to take the position and did NOT use the leverage provided by the broker, your ROI would only be 0.5% (100/20000). What if you’re wrong? Worst case scenario, if the stock goes to 0, you now owe your broker Rs 10,000. Your total loss will be Rs 20,000; not only have you eroded your capital from Rs 10,000 to 0, but you're also now **_indebted to your broker!_**  This is both **_your risk and the broker's risk!_** So far, using leverage to trade may sound like a no-brainer to you. Former ‘Shark Tank India’ investor **_Ashneer Grover_** explained how he used leverage to make a quick buck via the Zomato IPO. BharatPe's former MD **_earned_** **_a cool Rs 2.25 crore within 8 minutes_** of Zomato's massive stock market listing last year. Should retailers follow suit to make some quick, big money with leveraged positions? Absolutely not. Read on! Let's analyse Mr Grover's IPO play a little deeper. ![](https://prod.superblogcdn.com/site_cuid_cmbhlz3q0002sxzc513a62pj5/images/66cf005a6daebbc5bfdb977aashneer-6-1024x576-1749227312920-compressed.jpeg)Ashneer Grover, co-founder & former MD of Bharat Pe ## The Zomato IPO as it was For the IPO, Ashneer paid **_Rs 5 Cr_** out of his pocket, while Kotak Mahindra Wealth got him financing for **_Rs 95 Cr_** at an annualised interest of **_10%_** for one week (the period for which funds are blocked for an IPO). **_The leverage offered here is almost 20:1_**! Grover's purchase price was Rs. 76, and he sold all his shares at Rs. 136, 8 minutes after listing. Whenever a company decides to go public, there's a lot of documents that must be declared. Notably, one of these is the amount of shares available for each category of investors such as QIIs, HNI/NIIs, Retail etc. Mr. Grover falls into the **_NII or HNI category_**. Since the **_HNI/NII category was oversubscribed by 33 times_**, Ashneer was allotted Rs 3 Cr worth of shares. Let's have a look at the details of the trade and subsequent profit. ![](https://prod.superblogcdn.com/site_cuid_cmbhlz3q0002sxzc513a62pj5/images/66cf005a6daebbc5bfdb9771screenshot-2023-02-12-at-2-1749227312758-compressed.png)_The Zomato IPO as it was and how Grover invested in it_ A **_44% ROI in 8 minutes?!_** Sign me up…. right? Er, not quite. Loads of headlines and stories were published about Ashneer's success, but none highlighted the **_crazy risk_** that he took on. **_What would've happened if things didn't quite go his way?_** Let's look at two scenarios. ##### Scenario A: Oversubscribed by 2X and Opens 9% lower For this scenario, let's assume the IPO was only oversubscribed by 2X and not 33X. Additionally, let's suppose it lists at a discount similar to what another major unicorn did, **_PayTM_**. PayTM, was a company whose IPO was highly advertised and hyped by promoters and other stakeholders. However, it didn't live up to the hype at all, despite being hailed as ‘India's Largest IPO’ at the time. **_It listed at a 9% discount to the issue price._** So, what would Ashneer's P&L look like with the aforementioned conditions? ![](https://prod.superblogcdn.com/site_cuid_cmbhlz3q0002sxzc513a62pj5/images/66cf005a6daebbc5bfdb9774screenshot-2023-02-12-at-2-1749227312877-compressed.png)Ashneer's P&L if the Zomato IPO was 2X oversubscribed & listed at a 9% discount Clearly, the story isn't half as glamorous anymore. Had Zomato listed at a meagre 9% discount and would've only been oversubscribed by 2X, **_Ashneer would've lost 4.7Cr which is a -95% ROI_** !!! ##### Scenario B: Oversubscribed by 2X and Opens at Today's LTP What is Zomato’s true value? No one really knows. After the IPO frenzy was done with, **_the market perceived that the IPO price was too high_** and didn’t accurately reflect the food delivery giant's business fundamentals. The stock currently trades at Rs. 47, a **_37% decline_** from Rs 76, where he bought it. What would the numbers look like if the company listed at today's price and was oversubscribed by 2X? ![](https://prod.superblogcdn.com/site_cuid_cmbhlz3q0002sxzc513a62pj5/images/66cf005a6daebbc5bfdb9777screenshot-2023-02-12-at-2-1749227312742-compressed.png)Ashneer's P&L if the Zomato IPO was 2X oversubscribed & listed at the LTP (as of Feb 2nd 2023) Some bizarre numbers! In this scenario, not only would he have lost the entire sum he staked, but he would now **_ALSO OWE Kotak about Rs 14 Cr_** which includes an interest cost of Rs 18L. Can you now see the **_dark side of leverage and its inherent risks?_** This was Ashneer’s rationale for all the leverage: _"Of course, I knew of Deepinder (Goyal), and I am a big believer in his ability to persevere and keep building big. Fundamentally, with the pandemic the ticket size of their orders had grown, as people were ordering food from home for 3-4 members in the family, as against single rolls in office, thereby increasing Zomato's absolute margins.”_ This may still be fundamentally true, but the stock price is now **_38% lower!_** Therefore, **_when trading with any sort of leverage it is in your best interest to manage your risk and figure out how much you stand to lose in the worst-case scenario!_** Ashneer played the IPO FOMO game during the bull market and won. More due to the bull market than anything else. **_This is called leveraged beta, and NOT alpha_** 🤠 A similar game in today’s climate would be catastrophic. Does anyone want to try this on Oyo’s IPO? There’s a reason they postponed their IPO 😉😉 _Stay tuned for part 2, where we talk about the “implicit” leverage in F&O trading._ --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---