What is margin trading in the stock market?

Business

oi-Roshni

By Roshni Agarwal

Published: Friday, July 12, 2013, 13:25 [IST]

As per the discussion paper of SEBI on margin trading and securities lending, this form of trading is executed in view of the foreseen market outlook, wherein investors are facilitated to trade in certain securities with borrowed resources (funds and securities), without entirely self-owned funds. However, in the process, traders are required to maintain a minimum margin amount for the proposed transaction with the depository as good-faith deposits. Further, the margin amount is usually a percentage of the total transaction amount which is generally 15-20%, however it differs from scrip to scrip.

For instance: If an investor wishes to buy 100 shares of an X scrip trading at Rs 200, he can opt for the margin trading route, wherein the transaction would be partly funded by the trader (margin money) and partly by the broker (borrowed funds).

Margin trading proves to be a leverage mechanism for investors as they are allowed to perform trading with margin money. From the investor's stance, margin trading provides comparably larger exposure with a relatively smaller margin amount. In this way, chances of realizing higher profits or losses is increased.

SEBI specified guidelines for facilitating margin trading facility for corporate brokers

For a corporate broker to provide margin trading facility to its clientele, minimum net worth requirement is Rs 3 crore. Further, for such a facility, the broker member and the client are required to sign an agreement in a form specified by SEBI for the purpose. While extending margin trading facility to traders, the broker is allowed to use only his funds or avail financing facility from NBFC's or scheduled commercial banks.

Also, as per the guidelines of SEBI for margin trading, clients cannot avail the facility from more than one broker at one point in time.

Margin trading: Enhances efficacy of the overall securities market:

The margin trading strategy assists in smooth price discovery mechanism of securities and offers liquidity. This form of trading that is executed both ways that is from the buyer and seller end results in an increase in demand as well as supply of securities and funds. Eventually, because of increase in such forces, margin trading provides liquidity into the market. Also, this form of trading ascertains smooth price discovery mechanism of securities.