In the retail category, around 65% of the investors make investments amounting to less than ₹1 lakh. These investors are often considered small investors. Despite their small investment amounts, some costs like brokerage, taxes, and slippage can significantly affect their investment’s break-even levels.
You may wonder what a break-even level is? In this article, let’s walk you through the break-even point, its calculation method, and its utility in the trading strategy.
What is Break-Even in Trading?
Break-even in trading means the price level at which your total gains are equal to the total investment. You can say that it is the point at which your investment ‘breaks even’ – meaning the value of your trade has reached a point that covers all the costs incurred. It is often referred to as the point from where you start making profits.
For example, if you bought a stock at ₹500 and paid ₹10 on the brokerage, your break-even price will be ₹510. At this price, you will neither be at a profit nor at a loss.
2. Why Break-Even Level Matters for Traders
The break-even level facilitates informed decision-making. This is especially important for traders due to the following factors:
- Target Setting: It helps the traders set realistic and achievable profit margins. The break-even point ensures that the investment goal is able to cover both the market risks and the trading expenses.
- Improves Risk Management
With a clear break-even point, you can set smarter stop-loss levels and manage the position sizes accurately. It helps in minimising unnecessary risk and protects your trading capital. - Protects Against Overtrading
The break-even point tells us how frequent trading and hidden costs can silently erode the profits. It helps the traders in prioritising the quality over quantity in trades, improving consistency in the long run. - Provides Confidence:
When you know the break-even level, you remain confident even in volatile market conditions. There are fewer panic decisions, and you build trading discipline. - Enhances Decision-Making:
By understanding the break-even price, a trader can assess the viability of a trade. Traders can decide to go through a trade with the help of the break-even price.
3. How to Calculate the Break-Even Point
The principle behind the break-even point, that the total gains should be equal to the total cost, remains the same, but the method for its calculation depends on whether you are trading in stocks, forex, or options.
3.1 Basic formula for stocks and forex
The formula for calculating break-even for stocks and forex is:
Break-even price = Total cost of the trade / No. of shares
where Total cost = (Price per share*No. of shares) + Fees
3.2 Special case: Options and derivatives
Options and derivatives are a special case in break-even calculation because of the premium paid or received. The following formulae are used for calculation:
For call options,
Break-even price = Strike price + Premium
For put options,
Break-even price = Strike Price – Premium
4. Costs & Factors to Include in Break-Even Calculation
When calculating the break-even point, many hidden costs can slip past your eyes. Ignoring them can result in your profits being eaten away. The important costs and factors you should consider when calculating the break-even are given below:
Brokerage: The brokers charge a commission for the execution of trades, known as the brokerage. If you bought shares worth ₹20,000 and your broker charges a commission of 0.2%, you will pay ₹40 as the brokerage fee.
STT (Securities Transaction Tax): It is a government tax applied to equity and derivative trades.
Goods and Services Tax (GST): A tax of 18% is applied on brokerage. If you paid a brokerage of ₹40, a GST of ₹7.2 will be levied on it.
Stamp Duty: A state-level tax charged on the buy side of a transaction.
Slippage: Slippage is the gap between the price you aimed for the trade and the price at which it was actually executed. It is usually around ₹0.50–₹1 per share.
5. Using Break-Even in Trading Strategy & Risk Management
After you’ve found the break-even point, the next step is to use it in your trading strategy:
Setting Stop-Loss
Break-even acts as a point of reference for placing stop losses. They ensure that the risk is limited to the extent of your tolerance. For long positions, the stop-loss is set slightly below the break-even, and for short positions, it is placed slightly above.
Scaling Out Profits
When the trade starts moving positively, you can shift your stop-loss to the break-even, which ensures a risk-free trade.
For example, you bought a stock at ₹120 with a target price of ₹190. The stop-loss is set at ₹100. When the stock rises to ₹160, you change the stop-loss to ₹120. It puts you in a risk-free position.
Evaluating The Trade
Break-even helps in the assessment of the trade. It factors in all the costs to provide you with the point at which you are in a neutral position. If the costs are taking away your profits, it is better to skip the trade.
Managing Multiple Positions
When you are in multiple trading positions, using a weighted break-even can help to know the total risk exposure and planning of the trading strategy.
Adapting to Market Fluctuations
Markets are volatile in nature. When there are any shifts, it is useful to recalculate the break-even. Doing this keeps your trading strategy flexible with real-time market conditions.
6. Common Mistakes & Misconceptions about Break-Even
Even the most experienced of traders can make errors when finding or using the break-even point. Some of the most common ones are:
Ignoring Hidden Costs:
Hidden costs such as taxes, brokerage, or slippage can shift the actual break-even point without our realisation. These costs are often ignored, but they can add up and erode profits over time.
Assuming Break-Even Equals Safety:
At the break-even point, your trade is simply in balance. However, this should not be mistaken for safety. Markets are unpredictable, and any sudden change can turn your neutral position into a loss.
Moving Stop-Loss Too Early:
When your trade moves in a profitable direction, it is a smart move to change your stop-loss to the break-even point. It puts you in a risk-free position.
However, moving it too early can cause you potential loss if there is any unexpected fall in the price.
Ignoring Position Size:
The break-even may feel like a safety net, but ignoring the position size can be dangerous. Taking a large trade relative to your capital increases the risk and can wipe out a significant portion of your investment.
Confusing Break-Even with Strategy:
Another mistake that is often seen is using the break-even point as a strategy. Break-even is a tool, not a goal. It helps with the risk management decisions, keeping you disciplined and on the right track with your targets.
7. Practical Examples (Stock, Forex, Options)
Let’s see how break-even is calculated in real-life trading scenarios:
Stock Example
You bought 200 shares of ICICI Bank at ₹1,400 each. You paid a brokerage of ₹50. STT, GST, and other charges amounted to ₹50
Then, the Total cost = (₹1,400 × 200) + ₹100 = ₹2,80,100
Break-even = ₹2,80,100/200 = ₹1,400.50 per share
If the share rises to ₹1,410, your net profit will be:
Net Profit = (₹1,410 – ₹1,400.50) × 200 = ₹1,900
If the price drops to ₹1,390, your loss will be:
Loss = (₹1,390 – ₹1,400.50)*200 = (₹2,100)
Forex Example
You buy USD/INR at ₹88.20 with a trade size of ₹2,00,000, and your broker charges a spread of ₹0.02 per unit.
No of units bought = 2,00,000/88.20 = 2,268
Break-even price = ₹88.20 + ₹0.02 = ₹88.22 per unit
If the price rises to ₹88.40, your profit per unit = ₹88.30 – ₹88.22 = ₹0.18.
Total profit = ₹0.18*2,268 = ₹408 approx.
If the price drops to ₹88.00, your loss per unit = ₹88.00 – ₹88.22 = ₹0.22.
Loss = (₹0.22)*2,268 = (₹499) approx.
Options Example
Call Option: You buy a TCS ₹3,800 Call Option for a premium of ₹75, with a lot size of 150 shares.
Break-even price = ₹3,800 + ₹75 = ₹3,875
At expiry:
- If TCS closes at ₹3,900, your profit will be:
Net Profit = (₹3,900 – ₹3,875) × 150 = ₹3,750 share - If TCS closes at ₹3,860, your loss will be:
Loss = (₹3,860 – ₹3,875) × 150 = (₹2,250)
Put Option: You buy an HDFC Bank ₹1,600 Put Option for a premium of ₹30, with a lot size of 550 shares.
Break-even price = ₹1,600 – ₹30 = ₹1,570
At expiry:
- If HDFC Bank closes at ₹1,550, your profit will be:
Net Profit = (₹1,570 – ₹1,550) × 550 = ₹11,000 - If HDFC Bank closes at ₹1,595, your loss will be
Loss = (₹1,570 – ₹1,595) × 550 = ₹13,750
Conclusion
Understanding the break-even point is essential for any trader. It helps us to know the exact point at which our investment decisions turn profitable. It also helps in avoiding the impact of any hidden costs or emotional decision-making. Whether you like to trade in stocks, derivatives, or forex, the principle behind the break-even remains the same. When used properly, it leads to confident and profitable trading.
FAQ‘s
Break-even in trading means the price level at which your total gains equal total costs. You are neither in profit nor at a loss.
To calculate the break-even point in a trade, we use the formula: Break-even price = Total Cost / No. of shares.
When calculating the break-even, you should include brokerage, exchange fees, GST, STT, stamp duty, slippage, and financing costs. Ignoring them can create a false sense of profit.
Break-even is different for options trading because of the premium. For call options, the premium is added to the strike price. For put options, the premium is subtracted from the strike price.
When your trade starts moving in profit, you can move your stop loss to break even, which locks you in a risk-free position.
Yes, a trade that only breaks even can still be considered if you were able to manage the risk and protect your capital.
The common mistakes made by traders using the break-even levels are ignoring the hidden costs, wrong timing of the change in stop-loss, and confusing the break-even with the target.
