Opinion: Margin Trading Confusion and Reality – Why and When is a Margin Call Made?
अहिलेकै खातामा मार्जिन कारोबार गर्न सम्भव छ, कस्ता छन् मार्जिन कारोबार अवसर र जोखिम ?
लगानी न्यूज
The Securities Board of Nepal (SEBON) has scrapped the old margin trading directive 2074 from February 14 and implemented a new directive 2082.TAG_OPEN_div_99
Margin loans may be an alternative way to save money, especially for investors who lack capital but see good opportunities in the market. What is margin trading and how can an investor do it? What is needed for this? Is it beneficial for every investor? What could be the technical aspect of this? What are the risks? It is imperative for every investor to find the right answer to the question before making a margin trade.
What is a margin loan?
} Margin loan is a transaction facility given to an investor to purchase a share after completing the process as per the guidelines and depositing a certain percentage of the amount with a qualified stock broker. According to the recent guidelines, investors who want to take such loans can buy shares by taking an additional 70 percent margin loan if they deposit 30 percent of the amount. Margin loans are transactions with securities brokers. According to this transaction rule, if you have 30 percent of the capital initially, you can buy an additional 70 percent shares. The main thing to understand here is that if you only have 30, you can buy a share of 100.
TAG_OPEN_div_91 A share loan is an act of borrowing shares purchased by a bank or financial institution as collateral. To take such a loan, only after purchasing the shares by paying hundred percent of the money in the beginning, the shares can be deposited in the bank and the loan can be taken as per the rules. Especially, if you have to buy a share of Rs 100 in a share loan, it is necessary to get Rs 100 before taking the loan from the buyer, but in the case of margin transactions, only Rs 30 is enough. The shares held in the loan cannot be sold immediately. For this, you have to go to the bank and repay the loan and get the shares released, but if you have to sell the shares in the margin loan, you do not have to do this.
Initial margin is the amount that an investor has to deposit with a stock broker before making a margin transaction. According to the new guidelines, such margins should be at least 30 percent. This means that if an investor wants to buy a share of Rs 100 by taking a margin loan, then he has to have a minimum of Rs 30.
How to understand maintenance margin?
Margin Margin is the minimum percentage that an investor has to maintain while trading. According to the directive, a maintenance margin of 20 percent should be maintained. This means that if the market value of the shares purchased for Rs 100 falls to Rs 80, then the maintenance margin will have to be added, but even if the share price increases, no amount can be withdrawn from the initial margin until the share is sold. If the investor does not have the required capital to add such margin, he can keep the shares of A, B and G companies as a maintenance margin, but only 60 percent of the market value is calculated while calculating the value of such shares.
If the value of the shares purchased from the margin transaction increases and the maintenance margin is maintained, the additional shares so held can be released if the investor so desires. Also, if the margin is not paid on time, the stock broker can sell the shares without the investor’s order.
Why and when is a margin call made?
While availing the margin trading facility, it is mandatory for the investor to abide by the condition of maintaining the maintenance margin.TAG_OPEN_div_79 If an investor is unable to maintain a margin margin, the message given by the stock broker is called a ‘margin call’. According to this guideline, such calls are made when the assets are down by more than 20 percent but the investor does not have a maintenance margin. Suppose the price of a share of Rs 100 purchased with a margin loan falls to Rs 80, but the concerned investor does not deposit Rs 20 as per the maintenance margin rule, then the broker reminding the borrower of the outstanding amount is a margin call.
Is TAG_OPEN_strong_50 it possible to do margin trading on an existing account?
For margin trading, it is necessary to open three more accounts in addition to the one currently needed to be traded in the secondary market. Without these accounts, margin trading is not possible.
1) Margin Transaction Account: A margin trading account is an account opened by any investor to buy or sell shares through margin trading. The margin amount is deposited in this account.
2) Margin Transaction Beneficiary Account: A margin transaction beneficiary account is a beneficiary account opened by an investor to deposit the shares purchased by the investor through margin transactions.
3) Margin Transaction RAFSAF Beneficiary Account: The margin transaction RAFSAF Beneficiary Account is the beneficiary account opened by the member of the Central Company for the settlement and settlement of shares transactions through margin trading. This account has to be linked to the margin trading account and the margin transaction beneficiary account.
Are all shares marginally traded?
Shares of all companies listed on the stock market are not eligible for margin trading.TAG_OPEN_div_68 As per the guidelines, only those companies which have at least 25 lakh units of ordinary shares listed, net worth equal to or more than paid-up capital, net profit in the last three years and at least two years from the date of listing of shares issued by the Initial Public Issue (IPPSE) are eligible for margin trading. In the case of others, margin loan facility cannot be availed.
If the investor fails to repay the amount and liability taken for the margin transaction facility or is unable to maintain the margin margin, the margin transaction is an agreement taken in advance with the investor only for the purpose of selling shares in the beneficiary account and settling the margin transaction account. If the investor does not repay the margin loan on time, does not pay the maintenance margin or does not renew it, the broker has delegated the right to sell the shares of the investor.
A securities broker may provide margin trading facility up to five times of his certified net worth, provided that the loan taken by the broker from a bank or financial institution and the unsecured loan taken by the broker from his or her shareholder or director should not be more than 4.5 times the net worth of the securities broker.TAG_OPEN_div_64 In addition, the margin facility should not exceed 10 percent of the total margin facility that can be provided by the securities broker while providing margin facility to a client and his or her member of the same household or affiliated organization. The margin trading facility available as per the Directive will be for a maximum period of one year but can be renewed if it is preferred to continue after that period.
What are the margin trading opportunities and risks?TAG_OPEN_strong_48
Margin trading is an established method in the stock market. If we can use it with understanding, it is sure to be beneficial and if we do not knowingly encourage it, then it will be harmed. If the margin business can be done knowingly, then there will be an opportunity, but if you depend on others, then there will be a loss. If a company is well-informed, the market is rising, interest rates are falling, and the stock price is likely to go higher in the future, there is a lot of potential to profit by increasing investment through margin trading. But when the market is falling and interest rates are rising, there is a high chance of losing margin trading.
If you are unable to pay the margin to pay when the value of the shares you have traded in decreases, then on the one hand, there is a margin call and mental pressure is created, and on the other hand, the broker can sell the shares at a cheap price due to the failure to manage the margin on time. This creates a risk of losing the principal money that you have invested. Not only does it always provide profit and opportunity, but the amount of loss and risk is the same as the percentage of profit. Therefore, knowing margin trading can become a golden opportunity to create wealth, while it can become a sponge to absorb the wealth that is being sucked away by recklessly.
Finally, margin trading helps investors who have gained knowledge and experience but have stopped investing due to lack of capital. It is advisable for a new investor to use it only after a thorough study. The first rule of Warrant Buffett’s investment is to save your principal, and the second rule is to never forget the first rule. Therefore, if margin trading is done in the name of earning more in the stock market without information, understanding and experience, the principal money will be lost. Contrary to Buffett’s investment theory, it is certain that wealth will be lost and investment will crash. Therefore, we should always place margin trading in our investment only after properly analyzing the profit and loss of margin trading in order to get the maximum benefit from margin trading in the market.
(The author Achut Kumar Ojha is TAG_OPEN_span_45 TAG_CLOSE_span_46 a scholar of the stock market)
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