When I started my journey in the stock market, even I was not sure of a few terminologies related to this new world 10 years back. But with time, experience, & determination we can excel in any field. Our sole motto is to advise you how you can reap maximum profits so you should know these terms and their key difference with other terms. In this series, today I’m going to explain to you What is Margin in the Share Market? and the new rules introduced by SEBI for Margin Trading. So let’s begin.
Let’s understand the term Margin in layman language. It is simply broker offers you a loan to let you buy stocks that you can’t afford. Just pay a marginal amount of the actual value. In addition, you pay interest on the borrowed money. Margin requirement differs depending upon the type of transaction carried out. Thereby, Margin trading allows you to buys more stocks than you can afford at the moment.
In our day-to-day life, we are uncertain about several things like weather, health, future, traffic, etc, and take several steps to minimize those uncertainties. Similarly, when you start trading in the stock market you will not be sure of the market movement. One day market could go up the second day it may fall. Therefore, to address such uncertainties/risks, the stock market runs on the margining system. The upfront money you pay to your broker to buy those shares is referred to as an initial token or margin.
We will understand the concept of margin in the stock market in a positive and worst-case scenario. So as to avoid any place of doubt.
Investors buy 100 shares of HUL at Rs.2000 on Feb 1, 2022. In order to complete this transaction, you as an investor have to give Rs.200000/-(2000*100) to your broker on or before 2nd Feb 2022. In turn, your broker will pay this money to the stock exchange on 3rd Feb 2022 upon order execution.
But there is always a minimal chance that you may not able to arrange the required amount by said date. Thus, to safeguard the broker from such a situation and in turn, offer you an opportunity to buy those shares, you pay a portion of the actual amount. Let’s say you pay Rs.20000/- at the time of placing the buy order in turn stock exchange collects the same amount upon execution of the order.
Remember, for every buyer, there is a seller and if the buyer does not bring the money, the seller may not get his/her money.
Similarly, the margin is levied on the seller as well to ensure he gives the 100 shares sold to the brokers who in turn give it to the stock exchange. This way, margin payments ensure that both parties involved in the trade are serious about the transactions.
Let’s take the same case in the worst scenario. Suppose the margin was 10% to buy those 100 shares. Therefore, as an investor, you have to pay Rs 20000/- to the broker before buying. Let’s say you bought the shares in early trading hours around 10 am on Feb 1st and by the day end the price of the share falls by Rs.250. Now the total value of shares has come down to Rs.175000. And the buyer suffered the notional loss of Rs.25000 which is Rs.5000/- more than the margin amount. As an investor, you may decline to pay now Rs.200000 for the shares whose value has been reduced to Rs 175000.
Similarly, if the price has gone up by Rs.250 then sellers may not sell those shares at Rs.200000/-. Therefore, to ensure that both parties fulfill their obligations irrespective of the price movements. Sebi states collect notional losses upfront.
In the phased manner, SEBI has enforced intraday trading margin rules starting from 2020. Initially, stockbrokers were mandated to collect a minimum margin of the total amount of the margin by the day’s end. But from Sep 1st, 2021, a broker has to collect a 100% margin on leverage-based trade upfront.
Under this new rule, as a day trader, you’re required to maintain the 100% margin throughout the session, or else the broker will face a penalty. This new rule will protect the interest of retail investors from the troubles of leverage. Thereby it reduces the leverages provided to avoid swings during the volatility of the market.
Earlier the rule proposed was postponed from Dec 1st to Feb 28th, 2022 for the derivative market. As per the new rule, the investor will need to hold 50 percent of the value of the margin in their trading account.
So if you were a day trader in the derivative segment ready to keep extra cash in your account to take a position in futures and options.
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