SEBI has introduced some new margin rules from December 2020 .This rules are assigned to keep a deep look on broker’s and maintain more transparency in the stock market.
What is margin trading?
In terms of the financial market, Margin would be an immediate synonym for leveraging. It simply gives you the facility to shop for trade in stocks that we can’t afford to buy.
Through Margin trading, one is allowed to shop for the stocks by just paying the part of the particular value of shares. The margin is often paid either in terms of money or in shares as security.
The remaining shares are funded by our brokers. In other words, Margin simply refers to the quantity of cash borrowed from the broker to shop for the shares of a corporation.
The broker acts because the lender of cash and therefore the securities within the investor’s trading account are kept as collateral.
How to Trade using Margin?
To trade employing a brokerage account, one must have a separate account and not a quality brokerage account. A margin account is a separate trading account in which the broker gives money to the investor to buy shares or stocks.
One should use a margin account for short term trading as the interest on the margin money keeps on increasing with time.
For example, we deposit ₹ 10,000 in our margin account and we have a 50% margin that means we have the purchasing power of ₹ 20,000.
If we buy stocks worth ₹8,000 then we will still have a buying capacity of ₹ 12,000.
Steps in Margin Trading:-
- We should have to maintain a minimum margin throughout the trading session.
- The position needs to be squared off at the end of every session, we need to sell it off before the end of every day.
- If we want to carry the trade onto the next session, we have to convert it to delivery/normal trade.
If we miss any of the steps, our broker is automatically going to square off the trades of that particular session.
New Margin trading rule by SEBI applying from December:
Phase 1: From December 2020, the brokers are going to be penalized if the margin is quite 25% of the sum useful in danger and extreme loss margin.
Phase 2: From March 2021, brokers are going to be penalized if the margin on shares exceeds 50% and 70% of the sum useful in danger and extreme loss margin.
Phase 3: From August 2021, brokers will be penalized if the margin exceeds the Value at risk and extreme loss margin (ELM).
Here are some of the important Points of new margin rules updated by SEBI:-
Transfer of Pledged Shares:
The shares will be directly pledged to the clearing corporation that is Central Depository Services Limited (CDSL) or National Securities Depository Limited (NSDL). The investors will now enjoy all types of benefits on their shares as these shares are already in their Demat account.
Upfront margin collection:
Now it has become mandatory for the brokers to collect margins from the investors in advance for any buying or selling of stocks from any company.
Power of Attorney:
There will be no Power of Attorney given to brokers by the investors Earlier the investors had to offer authority to the brokers for executing the transactions on their behalf.
To Avail Margin:
For availing of the new margin rules in December, now the investors got to create a margin pledge separately for them.
Margin Loan:
Earlier collecting upfront margin wasn’t compulsory but now the investors will have to pay a minimum 20% margin upfront in the cash segment for availing of a margin loan.
Using intraday profit:
These are the shares that are bought today that cannot be sold tomorrow. Earlier the investors used intraday profits for making new positions on the same trading day. But now the investors will be able to use it only after T+2 days once they get the shares in your account.
