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How SBI is providing margin trading facility?

What is margin trading facility?

Margin trading is trading with borrowed funds/securities. It is essentially a leveraging mechanism, which enables investors to take exposure in the market over and above what is possible with their own resources. SEBI has been prescribing eligibility conditions and procedural details for allowing the margin trading facility from time to time.

Corporate brokers with net worth of at least Rs 3 crore are eligible for providing margin-trading facility to their clients subject to their entering into an agreement to that effect. Before providing margin-trading facility to a client, the member and the client have been mandated to sign an agreement for this purpose in the format specified by SEBI. It has also been specified that the client shall not avail the facility from more than one broker at any time.

The facility of margin trading is available for Group 1 securities and those securities, which are offered in the initial public offers and meet the conditions for inclusion in the derivatives segment of the stock exchanges.

For providing the margin-trading facility, a broker may use his own funds or borrow from scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to borrow funds from any other source.

The `total exposure' of the broker towards the margin trading facility should not exceed the borrowed funds and 50 per cent of his `net worth'. While providing the margin trading facility, the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the `total exposure' of the broker.

Initial margin has been prescribed as 50 per cent and the maintenance margin has been prescribed as 40 per cent.

In addition, a broker has to disclose to the stock exchange details on gross exposure including name of the client, unique identification number under the SEBI (Central Database of Market Participants) Regulations, 2003, and name of the scrip.

If the broker has borrowed funds for the purpose of providing margin-trading facility, the name of the lender and amount borrowed should be disclosed latest by the next day.

The stock exchange, in turn, has to disclose the scrip-wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin trading done on any day shall be made available after the trading hours on the following day.

The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility.

However, all transactions done on the exchange, whether normal or through margin-trading facility, shall be covered under the arbitration mechanism of the exchange.

Margin Trading: Conclusion

You are more likely to lose lots of money (or make lots of money) when you invest on margin.

• Buying on margin is borrowing money from a broker to purchase stock.

• Margin increases your buying power.

• An initial investment of at least $2,000 is required (minimum margin).

• You can borrow up to 50% of the purchase price of a stock (initial margin).

• You are required to keep a minimum amount of equity in your margin account that can range from 25% - 40% (maintenance margin).

• Marginable securities act as collateral for the loan.

• Like any loan, you have to pay interest on the amount you borrow.

• Not all stocks qualify to be bought on margin.

• You must read the margin agreement and understand its implications.

• If the equity in your account falls below the maintenance margin, the brokerage will issue a margin call.

• Margin calls can result in you having to liquidate stocks or add more cash to the account.

• Brokers may be able to sell your securities without consulting you.

• Margin means leverage.

• The advantage of margin is that if you pick right, you win big.

• The downside of margin is that you can lose more money than you originally invested.

• Buying on margin is definitely not for everybody.

• Margin trading is extremely risky.

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