Hello friends! Today we will discuss about Margin and leverage and how it affects? What are its pros and Cons and also the new SEBI(Securities Exchange Board Of India) Rule that is already executed in market and how it will change the market in near future? There are a lot of articles which are exactly analysing about this topic, but these could be very difficult to understand. I will explain here in very easy language that any common people also can understand.
SEBI Margin Rule which is executed from 1st Dec 2020 was 1st announced on 19th November 2019. After 1 year of introducing margin rules, it becomes compulsory to every Broker in India, otherwise they will be penalised. As SEBI is the authority for Indian Share Market, every one under it shall obey its order.
Let's understand what is margin before understand its impact.
In Simple word, A business to run effectively, A start up business, or a business who required high capital depend upon loan. It may be different type. Ex- Bank loan, Loan from public, like Debenture, Bond issue, Asset purchase on installments etc. Every organisation needs a sum of amount in which a part of money may be from loan. Likewise, Trade also required a capital and hence there is a provision of loan by the brokers, that the brokers provide their customers a certain margin which help them to take trade. In simple words, Margin increases the purchase power of a trader.
Ex- If a person has a capital of 1 lakh.
but he wants to buy 1000 quantity of RIL ltd. Share at INR 2000, can he buy it?
He may require 1000 X 2000= INR 2,00,000.
So, To buy such quantity of stocks, Brokers such as Zerodha. Upstox, angel broking etc., provide 4-6 time leverage of margin.
Let's understand from the above example.
If a broker provide 4times leverage,
Then he can buy worth INR 2,00,000.00 share by just 2,00,000/4 = INR 50,000.00
And there are a surplus of INR 50,000 available in fund.
This margin is provided only for intraday trade, that trader has to square off or close the position in between the required time period announced by the broker.
Benefit of Margin:
- It helps trader to take trade more and more.
- It increases the volume in market as it enables the purchase power of trader.
- It increases liquidity in market due to high volume, that every one can buy and sell at any time in market hours.
- It helps investors to take trade with professionally with the help of Hedging.
- It increases Turn Over of Brokers and business as well.
- It provides traders a great opportunity to learn with less money and become a successful trader.
Difficulties of Margin on trading:
- It affects beginner as they don't have control on emotions.
- Increases more loosing trades, because trader thinks he can take revenge from market, when he loose a trade and take trades again and again. And then he completely wipe out its whole money.
- Increases uncontrol losses, as beginner loose control over emotions and with the help of margin take more and more trade beyond capacity and wipe out their capital.
- Brokers provides a high quantity of leverages such as 20 times, 40 times 200 times also.
- Inequality in using margin due to different unit of brokers.
SEBI new Margin Rule:
As of now you as an intraday trader might have enjoyed higher leverages offered by many stock brokers, there was no limit as a matter of fact few brokers which i do not want to name have have been giving out 200 to 300 times leverage in equity and up to 100 times leverage in future & option.
So, instead of offering advanced or better trading platform, lower brokerage facility, better customer service experience or easy online user interface to clients they were selling margin as feature.
Margin for a trader is also very important, but excess of margin causes a heavy losses as we discussed in difficulties of Margin.
As per SEBI rule, The margin should be provided by each and every broker as per the below instruction:
1) Dec 2020-Feb 2020: Not more than 4times margin
2) Mar 2020- May 2021: Not more than 2 times of margin or 50%
3) June 2020- Aug 2021: Not more than 25% of margin, Ex- if a share price is INR 400, You need to use INR 300 from your capital and 25% i.e. INR 100 as leverage.
4) Sep 2021 Onwards, No more margin, it means, to buy INR 400 value of stock, you need to use total INR 400 from your capital.
What will happen after SEP 2021?
After Sep 2021, it will be end of margin period. Only the person who has sufficient fund can able to trade. Other people will only look for investment rather trading. There was a career option as a day trader. Mostly, it will be damaged. as those who have an idea on stock market but low fund will unable to take trade as it will be fully depend upon capital.
SEBI emerges these rules with a vision of safeguard to retailers, that they will not loose heavily. As there were a lot quantity of margin, beginner jumps with that and loose all the money they have. To protect them, SEBI brings the regulations. Now it is more important to understand that, due to no margin, how it will affect traders, Brokers, and share market.
Effect to small trader:
# It will decrease the loss quantity of retailer as there will be less quantity of trade due to low use of capital.
# Beginner will be benefitted as their capital will be safe upto some extent.
# But as a trader, they will not get much benefit of margin as it will enhance their profitability.
# Retailers also may affected by big player of stock market, as they can manipulate a stock easily.
# The big player like Institutional trader, Big investor can manipulated small shares easily because they have a high purchase power and to compete them, retailers had margin, which increases their purchase power also. But after this, they(retailer/ small trader) won't be able to fight back.
# It will be difficult to trade with Hedge as hedging also required additional capital.
# A lot of small trader will jump to option Buying trading which requires comparatively low capital to trade, But it has a low chance of winning the trade, which will again empower to increase losses of retailers.
Effect to Brokers:
# Almost all brokers will be same, and they will provide same kind of features.
# Brokers T.O. will be decreases significantly.
# There will be equality in providing margin as no margin features will be introduced.
# The brokers who featured high level of margin will become most affected broker.
# Other Rules as Power of Attorney will also won't be signed by customer and not be cheated by Brokers.
# Almost all brokers will be affected badly.
Effect to share market:
# Liquidity will be affected, as there will be less volume, hence will be reason fro falling volume on buy and sell.
# Decrease in volume of Equity and Future volumes. Intraday trader trades in these sector with the help of leverage. but after leverage, they won't be able to take trade as they took with the help of margin.
# High volatility due to decrease in transaction of retailers and a high control by Big players of the market.
# Will generate low interest towards stock market, as there are a lot of opportunity in Forex market and Crypto currencies.
# Investors also will be affected as they won't be able to sell the stocks as profit booking due to low supply.
# It will increase in volume of option trading as it require a small capital.
So, These are the basic and practical problems will be seen. Here We can find more difficulties. SEBI should consider on equality of margin instead of throw out from market. SEBI should aware the traders and should focus on educate the public. It will not affect public but will affect trader as they know the impact of margin, the requirement of margin. SEBI should focus on providing the knowledge about trading with proper risk and reward and other things. It should come with various platform to analyses the market impact and the solution for it.
As a trader and Investor, everyone will be affected, that to take trade in future and option selling, where minimum capital required is INR 2,00,000, which is not capable by everyone.
Thanks For Reading🙏
Wise world 21st🌏
If you have any doubt please let me know.