What Is Margin Trading?

What Is Margin Trading?

The Securities & Exchange Board Of India (SEBI) implemented new margin and share pledging norms from 1st September 2020. The step comes after several incidents of misuse of client funds were reported. Before we delve into the issue, let us understand margin trading and associated financial jargon.

Crux of the Matter

What Is Margin Trading?
Margin trading is when stockbrokers allow traders to buy more stocks than they can afford to by providing debt for making a purchase in exchange for some collateral and/or interest. Brokers give loans to clients against cash or securities or any form of liquid assets in their margin account. A margin account is to be opened for margin trading.

What Is Margin Loan?
A margin loan is the money borrowed from a broker to trade by pledging owned shares as collateral. While using margin account, initial margin is the amount that an investor needs to park with its broker. It is calculated as a percentage of the purchase price of a security. For instance, if the initial margin requirement is 30% of the purchase price, then an investor wanting to buy shares worth ₹1 lakh on margin, will be required to park via cash or pledge shares worth ₹30,000 with the broker. Here is an example of a trade done using margin loan:

In a leveraged position, traders gain is amplified by the ratio of leverage. Similarly, if the price goes down by 10%, she suffers a loss of 25%. Generally, there is an interest to be paid on the margin loan and commission to be paid on trade, both of which have not been taken into consideration here.

What Is Intraday Trading?
In simple terms, it means entering and exiting a trade within the same day. For example,
Person A buys 100 Reliance shares at ₹200/share and sells them at ₹210/share before the day closes. So here person A books an intraday profit of ₹1,000 (100 shares x ₹10).

What Is Stock Delivery?
The settlement of shares is done on a T+2 basis for equity and T+1 for derivatives and commodities. This means that stock will be delivered to your Demat account 2 days after the day of the transaction in the case of equity and after 1 day in the case of commodities and derivatives. The T in the T+2, hence, refers to transaction day or trade date.

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