What is the new margin rule on selling stocks

What is the new margin rule on selling stocks?

Even those who do not regularly trade in the stock market are aware of how volatile it is. The uncertainty in the movement of share prices leads to a certain level of risk that all investors must undertake.

To ensure that the buyers and sellers take their promises (of buying and selling) seriously, and a safeguard against frauds, non-payment of dues and spiralling into debts, the regulatory body has established margin requirements.

Is SEBI the sole market regulator in India? Are there others in the stock market that work towards smooth functioning, while protecting the interest of all players? Know more about the Role of Market Regulators in our blog here.

Let us now see what margin is and what it means to trading.

What is a margin?

Margins come into play in intraday trading, also known as margin trading.

Here, the investors can purchase more shares than they can afford by paying a part of the total share value, known as margin.

Margin also acts as a form of security that you must keep with your broker while trading in shares. This is a certain percentage of the share value that you

must extend in cash as a trader. It is among the various other costs traders have to bear. Know more about other Stock Investing Charges.

Both the sellers and buyers must adhere to the margin requirements. This is because, for every fluctuation in price, there may be a buyer unwilling to pay for the shares or a seller unwilling to deliver the shares.

As per the old margin requirements, if you wished to purchase 100 shares with a 20% margin, you had to pay Rs. 20, with the broker putting in the remaining amount. However, the brokers extended lucrative discounts on the basic margin requirements. They gave an offer where you only have to pay, say 10% of the margin, Rs. 2. Effectively, you could purchase the shares by using a lesser amount and get a higher amount of leverage on the shares. For the broker, they could pull in more investors by extending this offer, earning more brokerage as the volume of trade increased.

However, this practice put the brokers at significant risk of insolvency. Even though they willingly roped in more traders, a fluctuation in price could lead to default from the end of the buyers or sellers, emptying the reserves of the broking house.

To avoid such a situation, SEBI introduced new margin rules, which came fully into effect from 1 September 2021. Let us see what these are. Read More About new margin rule on selling stocks