FINANCE

Published on
KembaraXtra – Islamic Derivatives: Leverage in Share (Stock) Investment (Note Form)


🔹 1. Basic Idea
 
👉 In normal share investing:
  • ❌ No leverage
  • ✔ You pay full price of shares


✔ Example (No Leverage)
  • Share price = RM10
  • You buy 100 shares = RM1,000
 
✔ You fully own the shares


🔹 2. When Leverage Exists in Shares
 
👉 Leverage happens when you borrow money to buy shares
 
✔ This is called:
👉 Margin trading


🔹 3. How Margin Trading Works
 
✔ Example
  • Your money = RM1,000
  • Borrow from broker = RM1,000
 
👉 Total investment = RM2,000
 
✔ Leverage = 2x


🔹 4. Profit & Loss Effect
 
📈 If Price Increases
  • Gain on RM2,000 investment
 
👉 Profit is higher than your own capital


📉 If Price Decreases
  • Loss on RM2,000
 
👉 Loss can exceed your own money
 
❗ You may owe money


🔹 5. Key Points
  • Without margin → no leverage
  • With margin → leverage exists
  • Leverage increases:
    • Profit ✅
    • Loss ❌


🔹 6. Comparison with Futures & Options
  • Shares (normal):
    • Low risk
    • No leverage
  • Shares (margin trading):
    • Moderate leverage
  • Futures:
    • High leverage
  • Options:
    • Very high leverage


🔹 7. Shariah Insight
 
👉 Margin trading may be problematic:
  • ❌ Involves borrowing (possibly riba)
  • ❌ High risk/speculation
 
✔ Normal share investing:
  • Generally permissible


🔹 Simple Summary
  • Shares = no leverage (normally)
  • Leverage only if:
    • You borrow money (margin trading)


🔹 Final Exam Insight
 
👉 “Leverage in share trading arises only when investors use borrowed funds (margin trading), unlike futures and options where leverage is inherent in the contract structure.”
 

​
Picture
0 Comments

Author

Facts about finance