Changes in Trading Margin Rules in Share Market

The way you invest in the share market in India is changing from 1-August-2020, the new rules will come in force from Monday, which will be the first trading day of August. Securities Exchange Board of India – SEBI has modified the way Trading Margins will be collected from a client before placing his order. These changes are coming in the cash segment.

What is Margin Trading

When you invest in the stock market, you need to pay an upfront amount to the share broker before taking up the trade. This is like a safe deposit for the short term until your trade is settled. A Trade in India is currently settled in Trade + 2 working days. After the settlement, you can withdraw the margin paid to the stockbroker.

How is Margin Used by Investors and Stock Brokers

  • Example: You are buying shares for Rs.100000/- and the margin is 20%, you pay Rs.20000/- and take the trade for Rs.1 Lakh. It’s called leverage. Then the stock goes up by 5% at the end of the day. You make a total gross profit of Rs.5000/- Hence, by investing Rs.20000/- you made Rs.5000/- (This is just an illustration, we at Vridhi Money do not encourage such leverage trading)
  • Why the payment of margin is required while buying shares: A broker generally will insist you pay a margin in advance as protection. In case you don’t pay after purchasing, the broker can sell your shares and adjust the loss or profit against the margin.
  • Why the payment of margin is required while selling shares: This is the most common question. Many clients ask when Iam having shares why should I pay the margin. What happens if you don’t deliver the shares after selling? Thus a margin is required to adjust the loss or the profit. After the settlement, you receive the sale proceeds and the margin amount back to your account.

How was it going till now?

  • The stockbrokers were insisting margin payment from new clients. They were flexible with old clients based on relationship over the years. Trust does build up over time.
  • Also, until now, it was possible to buy shares against the sale value of another stock. E.g., If you sell Coal India for Rs.1 Lakh, you can buy ONGC for Rs.1 Lakh immediately as both trades will get settled together.

What is changing now?

  • The relationship between the client and the broker, the trust, etc., all are being put to an end. The trades from Monday onwards are going to be based on rules laid down. Don’t expect your stockbroker to be flexible with you any more.
  • Now onwards you need to pay the margin before buying a share compulsorily.
  • You have to pay the margin even for selling your shares compulsorily. In case you have Demat account with the same broker, they can do an early pay-in of shares and allow you to trade without margin. If the account is with some other DP, then paying margin is a must. Please don’t argue with the broker. They have to follow the rules 🙂
  • You can no longer buy against the sale value of another share like before. For the purchase of a new share, you will have to deposit a margin. Otherwise, you can wait for Trading +2 days for settlement of the sale transaction, once the amount is received by the broker, you can buy.

Why an investor needs to co-operate with the share broker?

You can ask your broker to flout the rules and buy or sell shares without margin, and you can say: in case of any penalty levied on you, I will pay!

That cannot happen. As per the new rules, the onus of collecting margin now lies on your broker. In case of penalties, he has to pay it, the same cannot be collected from the client. Hence, the broker now onward will have no option but to follow the regulations. The relationship does not matter anymore. It will be a pure business transaction.

How will it affect the Share Market?

  • Expect the volumes to dip for sure in the short term. We have no clue how it will take shape in the long term. Have to wait and watch.
  • Small intraday players will reduce in the market.
  • Small stockbrokers will further reduce! Already more than 60% are out of business in the last decade.

Feel Free to call your advisor or stock broker in case you need more clarifications.

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