Leverage: Your Fast Track to Riches... or Ruin?

It was another day where the market started well but could not really build on the initial strength. We did manage to end in the green, but there was no major action.

On Friday evening, Jerome Powell’s speech gave some hints about possible interest rate cuts in the future. This added some enthusiasm to emerging markets, gold, and other risk-on assets, which likely caused today’s early jump.

• Despite Friday’s heavy fall, today’s 0.39% gain in Nifty wasn’t bad.

• Nifty Junior added 0.25%, but midcaps lost slightly at -0.03% and small caps were almost flat at 0.06%.

• Bank Nifty remained weak, losing 0.02%. Unless something changes sharply, the outlook is not too hopeful.

• Gold rose 0.22% today on expectations of global rate cuts and is now trading at ₹10,053 per gram.

Other Market Triggers

• Idea was the mover for the second straight day, helped by expectations of AGR relief.

• Hyundai also stood out, gaining 4.4% after Crisil reaffirmed its AAA rating.

• On the other hand, Nazara halted its real money online games, with Poker Bazi being stopped, leading to a 25–30% fall in market cap.

What to watch next ?

• The online gaming troubles have spilled into media, as sponsorships and ad spends are shrinking. Media charts are forming a bearish flag, which could mean more downside if it breaks further.

• A bigger concern still hangs over the market – the additional 25% tariffs that go into effect on 27th August. If these are not reconsidered, some sectors will face a very tough time because a 50% tariff almost means no business at all.

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What To Read This Week ?

Navigating the Double-Edged Sword of Leverage

Leverage can be a powerful tool for amplifying returns in the stock market, but its true nature is a double-edged sword. While it has the potential to supercharge gains during a bull market, it can also accelerate losses during a downturn, leading to significant emotional and financial stress.

The key is to understand how leverage can work against you, especially in the short term, even if the long-term trend is in your favor.

The Allure of Amplified Gains

The appeal of leveraged products is undeniable. As seen with the WisdomTree Gold 2X Daily Leveraged product, a small move in the underlying asset (in this case, gold) can translate into a massive percentage gain for the leveraged product.

From 2010 to 2025, the leveraged gold product saw a 283% gain, outperforming the underlying gold's 239% gain. During a bull run from 2009 to 2011, the leveraged product surged by 215% while gold gained a respectable but smaller 92%.

This impressive performance can tempt investors into believing that leverage is always the way to go.

The Peril of a Downturn

However, the real danger of leverage becomes apparent during a market downtrend. The same mechanism that magnifies gains also magnifies losses. For instance, when gold experienced a 28% drop after 2012, the leveraged product plummeted by a staggering 62%.

This disparity highlights the emotional and financial risk involved. A sudden, sharp loss can be emotionally back-breaking, especially for those who entered the market at the wrong time. It can create immense stress and make it incredibly difficult to hold onto your position, potentially leading to panic selling and locking in a significant loss.

Key Takeaway:

• Don't Overdo It: Use leverage sparingly and avoid taking on more risk than you can handle.

• Have a Proper Exit Strategy: Define your exit points and stick to them. Tight, disciplined exits are crucial to protect your capital from being completely crushed in a leveraged downtrend.