The Lethal Cocktail of Trading & Borrowing

Successive reports by the capital markets regulator, the Securities and Exchange Board of India (Sebi), have highlighted that retail investors are the biggest losers when it comes to trading in the market through futures and options (F&O) and other derivatives. Nine out of 10 individual traders incurred losses, according to a report by Sebi, Profitability of Individual Traders in the Equity Derivatives Segment for FY25-FY26, released in August 2026.

But what is it about trading that leads to losses? Here’s the simple answer: the prices of stocks move up and down massively in the short term. Since trading is, typically, done over the short- to medium-term in a bid to capture profits from these frequent price movements, it becomes extremely risky. Predicting the market is impossible, which makes losses inevitable.

But when stock trading becomes an addiction to the extent that it even leads you to take loans of different kinds, the risk multiplies many times over. That’s because you don’t just lose your capital but become indebted when your call goes wrong. Loans add another layer of risk, making the stock trading game even more dangerous. Think of it as a snakes and ladders game, where a snake (read market or stock volatility) is waiting at every turn to bite you. And just when you think, you are close to acing the game, there comes the biggest snake of all to take you close to point zero. The only difference here is the snakes and ladders game doesn’t have negative numbering, which the stock trading game has, especially when you bring the debt component into the picture.

Says Ashok Suvarna, CEO of Aditya Birla Money: “The important question is how leverage is distributed across stocks, investors, and brokers. If the exposure remains diversified and concentrated in liquid and fundamentally strong stocks, the risk of disorderly deleveraging is relatively contained.” The key issue is not just how much leverage investors use, but which stocks they use it on, how easily those stocks can be sold, and whether they have enough money to meet margin calls if prices fall sharply, he adds.

The problem is that investors are often not that mature and are not able to use leverage wisely. They get swayed by the benefits, while ignoring the risks and costs, both personal and financial. They often don’t realise that one mis-step can land them into debt, which may just be the beginning of a deeper debt trap.

The Lure Of Leverage

The biggest lure is that a small amount of capital can control a much larger market exposure, magnifying both potential gains. What attracts investors is the ability to buy more shares than they can afford, in the hope of making money or to recover losses made in earlier trades. What they ignore is the losses magnify in equal proportion.

Leverage changed the way Himanshu Gupta, a self-employed full-time trader, approached trading. “Initially, I did not want to put serious capital into the market because I was still experimenting and learning what works and what doesn’t. But that creates its own problem, in a way. While a 1-2 per cent return is considered a good outcome in the market, it’s peanuts if the capital is small. Leverage changed that math for me. The same correct call that would have returned a few hundreds or thousands started returning much more.”

Suddenly, he says, his wins felt meaningful. “I started with 1-3 shares initially because that’s what the account allowed. But your conviction grows faster than your capital does. Margin facility lets me act on that by allowing me to buy 2-5x of the quantity I could otherwise afford to, without waiting years to build the base first.”

In fact, some investors presume trading can be a full-time career. Subhasish, a 35-year-old former civil services aspirant based in Delhi, who spoke to us anonymously, saw stock trading as a career option, taking cues from his peer group.

Rise In Borrowings

What proves that more and more people are willing to borrow in order to invest is the growing book size of the margin trading facility (MTF), a type of regulated loan facility extended by brokers.

As on October 13, 2026, it has reached Rs 1.56 lakh crore cumulatively for NSE (95.10 per cent) and BSE (4.90 per cent), roughly six times from Rs 25,000 crore five years ago. The stock market has not grown six times since then, but it seems investors’ willingness to use borrowed money to take larger positions has.

However, though the MTF book figure is large, it’s a fraction of the size of the Indian equity market. “While Rs 1.56 lakh crore of MTF exposure sounds large in absolute terms, it represents only around 0.30 per cent of India’s total equity market capitalisation,” says Amit Majumdar, group chief strategy officer at Angel One. India’s listed equity market capitalisation is around Rs 495 lakh crore.

Vedant Gupte, co-founder and CEO of investment platform Trackk adds that the number is relatively smaller compared to several major markets. “The US (book) runs near 2 per cent; China, 2.20 per cent; and Vietnam, 3.90 per cent. Japan, Korea and Taiwan (none of them monuments to retail restraint) sit between 0.37 per cent and 0.50 per cent. India is last on that list.”

If absolute numbers provide some relief, the pace of growth doesn’t. Says Gupte: “The level is fine, the slope isn’t. The stock market has not grown in the same proportion as the MTF market. When leverage grows faster than the market it sits on, that is not participation, that is conviction borrowing against itself.” He adds that the current MTF book number is the scariest sounding number in the Indian market right now.

Types Of Loans

The market has many loan facilities for traders. Here are some and how they work.

Intra-Day Margin Trading: This is typically offered by brokers, and allows you to buy or sell stocks on the same trading day along with taking larger stock positions with a smaller amount of capital. The way it works is you invest, say, 20-30 per cent of the trade value, while the broker funds the rest. In intra-day trading, you are expected to square off your position (sell all the stock holdings) before the market closes.

Let’s understand it through an example. Let’s say you want to buy shares worth Rs 1 lakh but you have only Rs 20,000. You use the loan to fund the gap of Rs 80,000. Some people may use the loan for the entire Rs 1 lakh. Now, suppose you buy 1,000 shares of a company at Rs 100 each. If the stock price goes up by say 5 per cent to Rs 105, the value of your holding becomes Rs 1.05 lakh (1,000 x Rs 105). You return Rs 80,000 to the broker and pay the brokerage cost for buying and selling. Minus the brokerage cost, you make a profit of Rs 5,000 or 25 per cent on your Rs 20,000 capital in a single day. The figure is higher if the total amount invested is larger (see How Margin Trading Works). Similarly, the losses multiply if the share prices fall.

MTF: This works like intra-day margin trading. The difference is it allows you to borrow for longer periods, which some traders prefer (see Intra-Day Margin Trading vs MTF). Himanshu is one of them. He says: “Intra-day forces the market to agree with you inside a single session. My view would often be right on direction but wrong on timing, and the stock market would do exactly what I expected, just three days later! I had been squared off several times, sometimes at a loss on a trade that eventually worked.”

MTF uses shares as collateral and has a steep annual cost of 15-18 per cent. For Himanshu, the funding cost was a trade-off worth taking. “The funding cost was small compared to what I was losing by exiting early. Intra-day made me trade the clock, MTF let me trade the thesis,” he adds.

Imagine the value of the share goes up by 25 per cent to Rs 625 in 60 days. When you sell, you get Rs 50,000. You pay off Rs 30,000 plus interest of roughly Rs 740 for 60 days and you are left with Rs 16,260. If you had just used Rs 10,000, your earning would have been Rs 12,500 at Rs 625 per share.

Your return goes up from 25 per cent to 62.60 per cent on your capital of Rs 10,000, when you use leverage. But again, that’s only the rosy side of the picture.

Options Trading: This is like an in-built leverage facility in a sense. In options trading, you do not need to pay the full value of the underlying shares, but a premium amount (usually fixed by option traders and the market movement). This premium amount is usually a small percentage of the total position you can take on a stock. For instance, if you believe that the index or stock is likely to go up, you buy a call option with the premium amount. Similarly, you buy a put option if you believe that the index or stock is likely to go down.

Suppose you speculate that the Nifty index will move up from the current 22,500 to 22,700 till the next contract, you buy the Nifty call option by paying a premium of, say, Rs 100. Since the Nifty lot size is 65, you need to pay only Rs 6,500. Since a contract, typically, lasts a week, fortnight or month, you can choose the period. If the Nifty reaches the target of 22,700, you make a profit as per the prevailing market premium. If the Nifty slips below the target price, the value of your premium becomes zero on the expiry date of the contract.

Loans From Banks, Friends Or Family: Many individuals resort to personal loans or borrow from friends and family. Personal loans have a high cost, typically 11-18 per cent and a tenure of 1-3 years depending upon the institution and your credit score, but when taken for trading, people tend to use it for shorter terms. Loans from friends and family may or may not have a cost, depending on the personal relations between the lenders and borrowers. For instance, Subhasish borrowed around Rs 25 lakh from his uncle over a period of time.

The Costs

The problem is that leverage works both ways. A rising stock can magnify gains on the investor’s capital, but a falling stock can magnify losses just as quickly. That’s a risk that can prove costly.

In the example for intra-day margin trading, if the stock price goes down by, say, 5 per cent, you make a loss of 25 per cent on your capital plus pay a cost for the loan.

In the example used for MTF, if the share price reduces by 25 per cent and becomes Rs 375, you would get Rs 30,000 (for 80 shares). In this case, you lose the capital completely as Rs 30,000 goes into repaying the loan, plus you owe the broker Rs 740 in interest. Your total loss is Rs 10,740 against Rs 2,500.

Margin Cost: Could the solution be holding the positions for a longer period? That’s obviously not possible in intra-day margin trading or options where the tenure is prefixed.

Some investors carry positions for several weeks or even months in case of MTFs. But there is an obvious catch. Says Suvarna: “MTF is increasingly being used for short- to medium-term positions, rather than only for very short-term trades. The longer a leveraged position is held, the greater the importance of maintaining adequate margins, particularly during periods of market volatility.” Markets and even stock prices may take months or even years to recover.

Brokers require investors to maintain a minimum margin against funded positions. If the value of the pledged shares falls below that level, the investor may have to bring in additional money or securities. If they fail to do so, the broker can liquidate the position to recover the outstanding amount. “A margin-called seller is not choosing to sell, not negotiating, not waiting for a better price,” says Gupte.

This becomes particularly uncomfortable during a sharp correction. While a cash investor can wait for a recovery, an MTF investor may have to arrange additional funds or face liquidation.

Financing Cost: The interest rates or brokerage costs can be an additional burden.

Says Manasvi Garg, chartered financial analyst and founder of Moneyvesta, an investment advisory and wealth management firm. “MTF interest rates can typically range around 9.50-18 per cent per annum, depending on the broker, plan and other conditions, with interest generally accruing daily.”

That means a stock does not have to fall for an MTF position to become expensive. If the stock remains flat for months, the investor continues to pay interest. Gupte says, “At a rate of interest of 9-24 per cent, a stock that goes nowhere still costs you money. Leverage does not care about your thesis, and it charges rent daily.”

In case of personal loans, the longer the tenure, the higher will be the interest payout.

Psychological Effects

Since trading is essentially based on speculation, many experts equate it to gambling, which can easily morph into an addiction. Just like in gambling, both winning and losing can have a psychological effect. When you win, you want to play another game, thinking you have gamed the game. When you lose, you want to play more to recover the losses.

Either way it’s tempting. In his 2024 annual shareholder letter, ace investor Warren Buffett said, “Markets now exhibit far more casino-like behavior than they did when I was young… the casino now resides in many homes and daily tempts the occupants.” In the 2026 Berkshire Hathaway annual meeting, he compared the stock market to “a church with a casino attached” with the participants in a “gambling mood”.

The disturbing part is the repercussions of borrowing to gamble in the stock market. Behind the averages that Sebi data shows, there are individuals who have lost far bigger sums, with devastating consequences.

The Making Of The Debt Trap: Until 2019, Ashish Singh, a 43-year-old Pune-based professional who did not want to disclose his real name, led what could be described as a financially secure life. He had a house, car and money in the bank account. Years of earning and saving had given him a sense of financial stability.

But that security gradually started unravelling when he ventured into intra-day margin trading and then options trading during Covid-19.

In the beginning, options trading appeared deceptively simple. A few successful trades brought quick profits and reinforced the belief that he could make easy money in the market. Soon, trading became part of his daily routine. “I made decent profit from trades in 2020 and 2021 and that gave me the confidence to take larger positions in the option segment,” says Ashish.

After the initial few profitable trades, which got him hooked, came the losses. What began as an attempt to make additional money from the stock market eventually consumed all his savings and assets. After margin trading facilities, he turned to personal loans, and then to friends and relatives.

The Revenge Trading Loop: For Ashish, the losses changed the nature of how he viewed trading. Instead of walking away from the losses, he doubled down on the borrowing, convinced that the next trade would help recover the losses from the previous one.

“When I lost Rs 8 lakh in a single day my objective was no longer to make a profit, it was to recover what had already been lost. Initially, I was taking positions only in Nifty but later I moved to Bank Nifty and stock-specific trades to make higher gains to recover my losses faster.” Note that the Bank Nifty is more volatile as it comprises a smaller number of stocks and all from the same sector, which concentrates the risk. This means that price movements even in a few stocks can lead to higher movement in the index. On the other hand, the Nifty index is a broader market index and includes stocks from various sectors.

Loans and borrowed money became the fuel for his trades. Every new position carried a triple burden: the possibility of another loss, the obligation to repay the money borrowed to take that position, and the previous debt he had.

Yet the psychology remained the same: he believed a few successful trades could change everything. It didn’t. The losses continued, and so did the borrowing.

What started as stock market investing had gradually become a vicious cycle: loss, borrowing, trading, another loss and more borrowing. Ashish’s is a typical case of addiction resting on revenge trading, which his family acknowledges.

Ashish is not an exception. Revenge trading is an extension of the behaviour error called loss aversion. This cognitive bias occurs when individuals refuse to acknowledge a loss because that action will lock it. They instead keep holding on to their loss-making asset or stock in the hope of recovering the losses.

Janbaaz Khan, a 31-year-old full time trader and a small business owner based in Delhi, has a similar story. He began investing with Rs 30,000, which he extended through intra-day margin facility. An early loss of Rs 1,000-1,200 turned into a problem to be solved rather than a loss to be taken. “Instead of accepting it, I put in the remaining capital and increased the quantity. I was sitting with that position the entire day. At that time, I didn’t even know that an intra-day position gets automatically squared off at the end of the day. Ultimately, I lost around Rs 4,500.”

Then came the part he now warns every beginner about. “After that, revenge trading started. I wanted to recover the money I lost. I started taking 8-10 trades (without making any profit). Charges were also eating into whatever profit I was making,” he says. Now, he has stopped leveraged trading altogether.

Disastrous Consequences: When the markets started to stutter after the Covid bull run, Subhasish saw the ugly face of trading. As his trades started losing money, his first response was to try and win the money back. He increased his exposure to futures and options (F&Os) in the hope of recovering his losses, only to realise later that revenge trading was making things worse. He now sees it as a learning experience and considers his losses “tuition fees”. He has not yet repaid the money to his uncle.

Subhasish got his lesson early but those who don’t often pull down their families along with themselves.

As losses mounted, Ashish’s assets that had taken years to build began disappearing one after another. First he sold his car, then his house. His bank deposits are exhausted and he has moved into a small rented house with his wife.

He now has a huge debt of Rs 2.50 crore. He has borrowed money from his in-laws and relatives to repay a part of the outstanding loan. He has also restructured his loans and is now servicing the debt using not just his own but also his spouse’s salary. His relatives, who lent him money, remain uncertain about when they will get it back, as he continues to prioritise repaying his bank loans.

What You Should Know

The real test comes when a leveraged stock falls sharply and the investor has to absorb the loss. Garg says investors should first check how much margin cushion they have before taking an MTF position. “The most important rule is that you should not wait for a margin call before taking action,” he says. “Once a margin call is triggered, an investor has much less flexibility.” The broker gives a margin call when the value of an investor’s position falls and the available margin drops below the broker’s required level. At this point, you need to deposit additional funds. Remember that it is not limited to intra-day trading, it can also be applicable in MTF.

Investors should also keep enough money outside their MTF positions to meet a possible margin requirement. They must include the cost of borrowing when calculating their returns. A small gain may not leave much profit after paying interest.

Says Garg: “Do not keep adding leverage to a falling stock simply to average down, this increases exposure when the risk is already rising.”

Other experts caution about pledging falling stocks. Says Gupte: “Do the break-even math before you enter, not after. Keep top-up cash outside the position. And never meet a margin call by pledging more of the same falling stock, which is not risk management, it is doubling down with extra steps.”

Leverage can make profits look bigger, but it can also make losses tougher to recover from. The real test is not how much you can borrow or how large a position you can take, but whether you can withstand a wrong call without putting your financial future at risk.

kundan@outlookindia.com

rishabh.raj@outlookindia.com