SEBI new margin rule explained

Stock Market Investment Shot, 28th December 2022

Stock Market Investment Shot, 28th December 2022

SEBI has released a new rule, and everyone in the equity market needs to understand it clearly. The new SEBI rule is only for traders and may not impact investors directly. However, it may affect even investors.

Role of traders and investors in the market

Many people do not understand, but the reality is we need both traders and investors in the equity market for proper functioning. Traders are the one who does day to day trading and ensures the investors have enough liquidity to buy and sell shares. If investors are not there, the traders have no basis from whom to buy and sell. Both play their role to run the financial market as we know it today.

You may be wondering why we are discussing the importance of investors and traders. The new SEBI rule may only impact the traders, but now that you understand how the balance is maintained, you will know how investors may get impacted.

The new rule

According to the new margin rule, traders dealing in futures and options and intraday trading will have to keep a 100% margin in the bank account to proceed with the trade effective 1 September 2021. 

The news of a 100% margin should not come as a surprise to traders. It has been implemented in a phased manner by SEBI. Traders had to pay 25% of the peak margin in their accounts between December 2020 and February 2021. The margin increased to 50% between March and May. It was 75% effective from 1 June 2021 up until 1 September 2021.

There is a concept of Value at Risk (VaR) defined for each stock. This 100% margin is based on the VaR margin. To understand how this rule will impact traders, we also need to understand the concept of leverage.

What is leverage?

A trader X decides to buy a stock of ABC company that is trading at Rs 100. He buys 100 shares of a company with a net investment of Rs 10,000. If the share price increases to Rs 120, he makes a profit of 20% on his investment.

Another way he can trade the same stock is by using leverage (borrowing the money). Let us say the broker/exchange is giving 10X leverage on this stock. It means, with Rs 10,000 capital, trader X can trade with Rs 1,00,000. Now he can buy 1000 shares of the same company with Rs 10,000.

If the share price increase to Rs 120, he makes a profit of Rs 10,000 (1000 * 20), a return of 100% on his investment. It may look attractive until you consider the opposite scenario. If the stock price falls to Rs 80, the trader will end up losing his whole capital.

The change

Basically, with the new rule, the leverage the traders used to get has been reduced. The traders now have to shell out more money to bet during futures markets and intraday. If the margin is not maintained by traders during the trading session, they will have to pay penalties.

The idea by SEBI is to control the leverage being taken by the traders and thereby reducing risks. The margin requirements will be calculated four times during every trading session and will include intraday trading positions.

BTST Closed – Before this new rule, the shares you bought today, you had an option to sell them tomorrow or even immediately. Now, if you buy a share of TCS on Monday, you can only sell those shares after receiving the delivery of shares. So, you can sell them only on Wednesday (T + 2).

Impact to brokers

The new rule will not only impact traders but also brokerage companies. Intraday traders generate the maximum volumes and revenues. With this new rule, small traders may stop trading (profits margins will be lower) or trade with lower volumes. Either way, it is going to affect the brokerage industry significantly.

Impact to investors

As discussed above, it is expected the liquidity in the market will become lower as volume may decrease going forward. However, the data so far has been the opposite of what was expected. The trading volume has increased on 1 September.

Here are the numbers – Trading volumes on 1 September on both BSE and the National Stock Exchange (NSE) were 449.90 million and 2,330.06 million, respectively. The average volume from the beginning of January till August was 300.45 million and 1,027.24 million on BSE and the NSE, respectively, 

The reason given for no drop in volume is because of the current market condition – the market is going in a single direction now. Traders don’t want to miss the opportunity of making money.

Experts feel when the market becomes bearish or sideways, the volumes will go down for most of the stocks significantly. We will have to wait for that to happen. For now, the market is making new highs every day.Investors who are not sure where to invest in a rising market can check out Jarvis Invest. It is an AI-driven platform that tells you where to invest your money depending on your investment horizon and risk profile. You don’t have to time the market. No matter what the market condition, Jarvis has opportunities for you to invest your money.

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