What is Margin in Share Market
If you trade in the stock market, and you come to know about a very attractive deal, but for this there is not enough money available in your demat account, then you can take the facility of ‘margin’ from your broker. Margin in the stock market refers to the amount of money that is available in your trading account.
Technically this allows you to buy ‘shares’. But in practice, many broking companies related to the purchase and sale of shares also provide ‘finance-facility’ to their customers for the purchase of shares, that is, lend to buy shares. This is called ‘leverage’ or margin trading.
By buying shares on margin, i.e. by taking loan from a broking firm, you can multiply your ‘returns’ i.e. profits by many folds as compared to buying with actual funds available in the account. However, this requires that the investment made continues to outperform the cost of debt.
Simply put, margin in the stock market is a credit facility that you get from your broker for investing. This allows you to ‘overdrive’ your demat account to pay more than the amount available, thereby increasing your ‘profits’ without increasing the risk. In this the broker takes the stocks as ‘collateral’ and provides you short term loan for trading. It is also called ‘secured loan’.
How Margin Works in Share Market
If your broker provides you ‘MAS’ i.e. margin facility on shares, then its process goes like this –
Shares are transferred from the client’s account to the beneficiary account of the broker, the shares are further transferred to the client’s margin account by the stockbroker as a Depository Participant, the amount of margin depends on the price of the shares; This is done after subtracting the ‘hair-cut’.
Explain that the haircut in the stock market refers to the difference between the amount used by the collateral for investment and the market value of the asset. The margin money can be used by a client for intra-day trading in the share market, as well as for trading in stocks, trading in equity futures, investing in currencies, etc.
However, it cannot be used for delivery of equity. When a client does not want to use this credit facility or margin money provided by the brokers, he can withdraw his ‘collateral stock’.
Process and cost of availing margin facility in share market
The ‘MAS’ account that provides you margin facility on shares is separate from the D-mat account linked to the trading of your shares. Some brokers may ask you to make some initial deposit to ‘activate’ the margin account. When the funds in the margin account run out
So to maintain this initial margin the broker may ask you to deposit more amount. Although brokers generally do not charge you any fee to operate or ‘manage’ the margin account; But you can transfer the ‘extra-fee’ to your margin account ‘off market’.
It should be noted that during ‘intra-day’ trading, if you violate the ‘margin’ provisions at any time during the day, then you will have to pay a penalty of 0.07% per day.
On availing margin facility in share market, the ownership of shares is
The ownership of shares does not change when a client invests in the stock market by availing margin i.e. credit facility from his broker. That is, the client continues to own the shares even after availing the credit facility from the broker. And if the client continues to meet some obligation such as paying the interest
So he can use ‘margin’ for any time frame. At the time of sale of shares from margin account, this process goes to the broker, which he adjusts to your margin account.
Some things to keep in mind while using ‘margin’ in the stock market
Before availing the margin facility in the share market, understand that the ‘collateral’ method is used for margining only on certain securities. Therefore, it is important that you first get a list from your broker of those stocks, bonds, etc., which can be used for ‘margin-advance’. When you request for a loan i.e. margin to buy shares, etc., the broker increases the amount by cutting the exchange ‘hair-cut’.
Apart from this, some terms and conditions ie restrictions are imposed on behalf of the exchange from which you deal in shares. For example, if the cash and collateral ratio of 50-50 has been prescribed by the exchange, it means that fifty percent of the total investment amount should be in cash,
Then the remaining fifty percent amount will be available as ‘margin’. That is, for example, if you need one lakh rupees to buy hundred shares of a company at the rate of one thousand rupees, then fifty percent of it ie fifty thousand rupees should be available in cash in your account.
What will be the advantages and disadvantages of using margin in the stock market?
If the market value of the shares or assets in which you invest using a margin account increases, you stand to gain much more than your actual cash investment.
In this case, the profit you get is ‘adjusted’ by deducting the margin amount.
But if the investment made by you using a margin account turns out to be a loss, the margin money can also be ‘adjusted’ by the broker by selling the shares pledged as a ‘collateral’.
SEBI’s new rule for margin in share market
It may be known that the Stock Exchange Board of India ie ‘SEBI’, the organization that regulates and controls the business of the stock market, has made some new provisions regarding the use of margin. This has been done to protect investors in the stock market as well as reduce market risk.
In fact, SEBI has implemented two rules related to margin. The first of these is related to ‘cash market upfront margin’. Which means such a ‘transaction’ in which the delivery of shares takes place. While SEBI’s second rule is about ‘peak margin reporting’, which is related to ‘derivative-trading’.
In fact, before this, after the sale of shares in the stock market, the ‘T + 2’ model used to run for its delivery. That is, whatever day you trade or buy shares, it will be debited/credited in the next two days, and the transaction from your account will also happen in the next two days. In this method, brokers allow their clients to buy shares even if they do not have money in their account, on the condition that the amount will be paid within T+1 or T+2 i.e. within a day or two of the transaction.
But now as per SEBI rules, the broker has to take 20% upfront from the client of the total value of the deal. That is, at the time of trading, the client will have to pay 20% of the amount. He can deposit the remaining amount in T+1 or T+2 i.e. in the next day or two. Similarly, as per the new rules, you should have sufficient margin in your account while selling the shares.
This rule reduces the chances of a client buying a share before the amount is deducted from the account in the next two days, thereby reducing the risk in the ‘settlement-system’.
However, the system of selling shares by SEBI has also been given without margin. But for this, the broker should have some such provision that on the day of sale of shares, he should transfer them from the client’s account to his own account. But there may be some ‘operational problems’ in this too.
Thus we can see that margin account in share market gives you the flexibility to invest many times more than your actual buying capacity. But we should also take necessary precautions while using it. Because in this the losses can also be much more like the benefits.
To start trading with a margin account, you have to first request your broker to open this account, and initially deposit a minimum prescribed amount called the minimum margin.
There are broadly three ‘steps’ you should consider while trading with a margin account – maintaining minimum margin, getting back to your pre-position at the end of each trading session i.e. selling the shares you bought or selling the shares using margin buy back the shares in time, and third, convert the shares into ‘delivery orders’ after trading.
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