Conviction of Mind

Leveraging in simply increasing your exposure in something with some money that you don't have and thereby inherently increasing the risk. Typical example for a normal common man would be 'Buying a house' - Where most of the money is given as a loan by the bank and he is thus said to be leveraged. For a equity investor, few of the other examples would include Stock Futures, Options and Margin Intraday trading. Without the money in hand, only the risk will be increased in each of the case and typically Leveraging is the concept where you will be get high returns along with high risk. For example, Reliance is at Rs. 800/- now. you think, it will go Rs. 860/- in next 3 days. You have Rs. 5000/- in hand, which you can afford to lose. Remember, you shouldn't be taking risk on a capital that is required next day for your need. Option 1: Buy 6 shares - 6 * 800 - Rs.4800 spent. Profit - 60 * 6 - Rs. 360/- Option 2: Buy 60 shares - 60 * 800 - Rs. 48000 spent

An asset is said to be more liquid if it can be converted to cash quickly, without changing much of its value. Gold, Cash, good blue-chip Stocks are excellent examples of liquid assets. Liquidity Real estate, PPF, ULIPs and other complex products are excellent examples of illiquid assets. PPF is safe but illiquid as it has a lock-in period. So, why does it really matter to me? It is important to have some emergency fund in liquid form. If your expenses for a month is around Rs. X/-, you need to have Rs. 6X/- as contingency emergency fund in liquid form. How does it affect a bank or investment bank? Bank lends money based on the documents and collateral. If the collateral is a illiquid asset, the risk is more. They might not be able to get the money on time. Investment banks and Hedge funds also creates complex products to help banks in creating more money to lend more. If the underlying asset is illiquid, the risk would be more. The risk is actually, we migh