Margin Trading :
Margin trading was introduced by SEBI to curb speculative dealings in shares leading to volatility in the prices of
securities.
“Initial margin” in this context means the minimum amount, calculated as a percentage of the transaction
value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the
balance amount to meet full settlement obligations.
“Maintenance margin” means the minimum amount, calculated as a percentage of market value of the securities, calculated with respect to last trading day’s closing price, to be maintained by client with the broker.
When the balance deposit in the client’s margin account falls below the required maintenance margin, the broker shall promptly make margin calls. However, no further exposure can be granted to the client on the basis of any increase in the market value of the securities.
The broker may liquidate the securities if the client fails to meet the margin calls made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or the cheque has been dishonoured.
The broker may also liquidate the securities in case the client’s deposit in the margin account (after adjustment for mark to market losses) falls to 30% or less of the latest market value of the securities, in the interregnum between making of the margin call and receipt of payment from the client.
The broker must disclose to the stock exchange details on gross exposure including the name of the client, unique identification number, name of the scrip and if the broker has borrowed funds for the purpose of providing margin trading facilities, name of the lender and amount borrowed, on or before 12 Noon on the following day.
Stock exchanges disclose scripwise gross outstanding in margin accounts with all brokers to the market. Such disclosures regarding margin trading done on any day shall be made available after the trading hours on the following day through the website.
Thus, margin trading acts as a check on the tendency of clients to manipulate markets by placing orders on brokers without having adequate money or securities to backup the transaction. Margin trading will also acts as a curb on short selling and short buying.
The reduction in above tendencies on the part of clients reduces volatility of prices on the stock exchange and provides stability to the common investors.
Margin trading mechanism also ensures transparency in dealings in securities and public exposure of the information regarding the backing behind all major securities transactions. In the Indian capital markets particularly excessive short selling and market positioning have been rampant. Margin trading has acted as a stabilising force.