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  • What are margins in cash segment in the trading market?

    Do you want to know about the margin in cash segment in trading? check this ISC page to know more about this from our Experts.

    I would like experts to explain what is the concept of margins in cash segment referring to in terms of trading of shares. Specifically, what is the meaning of this: Penalty for non-collection/short collection of upfront margins in cash segment. Penalty for what exactly?
  • Answers

    3 Answers found.
  • When a person does transaction in the share market then there are mainly two modes of it. The first one which is very common and most of the people do in connection with share buying or selling is cash segment. In this mode we buy or sell some shares online (through our demat account naturally) and suppose I do some transaction today then I would be paying or getting money in 2 days and this transaction in the cash segment is denoted as T+2, which means transaction day plus 2 days. So, if you are selling some shares today then the sale proceeds would come to your bank account after 2 days. If you are buying shares today then in your demat account itself you would be asked to allocate funds for it and after 2 days those funds would be taken out. You cannot take back or use your allocated funds for any other purpose and after 2 days you would see that those funds have gone out from your account and you have received the shares and you can see them under your holding statement.

    The second mode is Futures and Options commonly known as F & O segment. In this mode a person like us (investor) can opt for buying (or selling) a certain quantity of particular shares (scrips) at a specific price at a future date. It appears strange as how we can do that. But it is very simple as is done through the software platforms which keep a track of everything. So we have to specify the price also after whatever study of the market we have done. Let me make a simple example here. Suppose there is a company whose shares are quoting in the market at Rs 28 per share. Now as per my study of the market I feel that these shares have a potential and it would go up to some good value in next 10-15 days and assuming so, I enter into a future contract for 20 days to buy 200 numbers of shares at a price of say Rs 35 (this will be as per our desire only and whatever we want to specify we can). Let us assume that the share price suddenly rises and reaches Rs 55 after 20 days when our contract is maturing. What has happened is that as per contract I would pay only Rs 35 per share but now can sell it in Rs 55 making a clean profit of 200 x (55-35) = 4000. This is a very rosy picture but what happens if instead of above rise in those 20 days the market tumbles and the share price goes to Rs 15 on that day when our contract is expiring. I have to pay Rs 35 per share only but my worth is now less and I make a loss of 200 x (35-15) = 4000. This is not a rosy picture at all. Share market is a risky endeavour. I have explained the future contract here but option contract is also there albeit slightly different but one can understand that in the same way by reading about that in reference books or internet.

    Let us now try to understand the concept of margin. In a F & O contract the buyer has to pay 10% initial margin to the broker (through the online demat platform only) and rest when the contract expires. This margin money is important and brokers have to inform this to the SEBI periodically. If there is some laxity in this SEBI would impose penalty on them. SEBI has now ordered that the brokers/ Trading Member (TM)/ Clearing Member (CM) have also to collect these margins in the cash segment. So, this is a new direction and there is order to adhere to it strictly failing which SEBI can impose penalties on the brokers or brooking houses. It has nothing to do with investor as investor is ready to pay the margin also as it would be adjusted in the end of T+2 or 15-20 days time in case of F & O. SEBI wants that there should not be any trading without the margin money in sight as some people do the trading and then disappear from the scene through malpractices or built up huge piles of unpaid margins or other such defaulting practices.

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  • While purchasing shares, you would have to maintain sufficient limit so that the order value of the stock is fully protected. In case of selling shares, you need to have your Demat Account.
    In the margin trading, a certain amount of fund is blocked which would not exceed beyond the extent of applicable margin percentage of the order value. Investors prefer to use margin money to increase their purchasing power so that they can have more stocks without even paying for it. But again there is some drawback in such a process in the sense that you would invite the risk of higher losses.
    Let us understand the concept of margin in terms of shares -
    1) How does it affect the leveraging process?
    Let us suppose that a stock was brought at Rs 60/- and the price of the same rises to Rs 75/-. If there is the process of selling of such shares considering the involvement of cash, you will earn 25 percent.
    On the other hand, had the stock been purchased on margin money utilising 1/3 of the stock price ( in this case, it will be Rs 20/-), you would earn a return of 75 percent on your money, which was originally invested.
    But even it carries risk, there may be erratic movement of the price causing a sharp fall in its price. In such cases, the losses would be moderate, had it been purchase from the cash but buying the same on the margin money , the loss may even go to the extent of hundred percent.
    2) Keep a track of additional margin requirements-
    Your margin position is continuously reviewed and once the market to market( MTM) loss exceeds a certain threshold ( MTM), a call for the additional margin is made to compensate the difference.
    In case, the limit is not sufficient enough to meet the call for the additional margin, the broker may not entertain your trading to carry forward.
    Hence while some stocks are sold on the margin, ensure that your trading limit has not been fully exhausted.Additional margins are to be maintained at all levels so as to keep comfortable free limit.
    3) Identify the Risks -
    Margin trading involves risks and therefore it may not suit every investor. The following points need to monitored closely-
    1) You can loose more money than other investors.
    2) Don't over leverage your position.
    3) You will have to square off your margin position sometimes.
    4) You have thoroughly understood the trading practices of the exchanges.

  • Cash segment is buying (or selling) the shares at the spot price and paying (or getting) the price immediately. That mean investor has to provide for the full amount of buying in his account with the broker.
    When the investor does not keep the full amount needed for buying shares, he keeps a certain portion; called Margin, and the rest the borrower finances him. This trading where the borrower does not have full funds but trades with a portion of th trade value, and depends on the broker funding him is 'Margin Trading".
    Margin trading was not allowed earlier in cash segment.
    But a few years ago Securities and Exchange Board of India (Sebi) allowed margin trading in cash segment "borrowing funds from a broker to purchase stocks ". It allowed brokers having net worth of a specified amount can provide margin trading to their clients.
    SEBI laid down some conditions and stipulations including restricting such margin trading to some specified group stocks under NSE. For buying stocks on margin the investor has to pay a certain percentage of the amount and rest will be financed by the broker.
    For margin trading investor has to open a Margin account (MTF-Margin Trading Facility) with the broker. Depending on the pre-determined total value of trade you are required to keep the margin amount in the account. You are always required to keep a specified amount as minimum margin. A client can have MTF with only one broker and has to give a declaration in this regard.
    Recently SEBI has allowed the furnishing shares also as security instead of cash margin. If the required margin is not maintained then broker can sell the shares and keep the margin.
    Margin trading has benefits as well as risk depending on how the price fluctuates and what is the interest charged by the broker.

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