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• Margin trading means we borrow from
broker to invest in stocks.
• It increase borrowing power of the
• It allow the investor to buy more than
normal stock which he can actually
What do we mean
Investor need to open a separate margin account
apart from the cash account.
Investor need to enter into separate derivative
A minimum amount is needed to open a separate
margin account 2000$. This deposit is known as
there is another restriction which is known as
maintenance margin, it is the minimum amount that
the investor need to maintain.
Requirement for margin
Margin trading is just like a collateral.
Investor need to pay the interest on the
amount they borrow.
The longer they hold margin stocks they
need a high return to break even
Thus margin trading is generally preferred
for short term investment.
Cost of margin
Only a portion of the
investment proceed comes from
your own money
• Remaining portion is borrowed from a
• Bet on a rise in the price of the security
• Higher leverage, magnifying upside and
• Stocks purchased on margin must be
maintained with the broker as collateral for the
• Increased buying power with less money.
• More profit with less investment.
• A trader can burrow up to half of his purchasing
price as initial margin.
• Greatly suitable for day traders, who need to
complete more number of trades with higher
• Suitable for experienced traders, having knowledge
of stock market trend patterns.
• Add more burdens on traders’ shoulders in losing trades.
• Cannot trade all stocks - like OTC stocks, penny stocks,
• Your account balance and buying power changes with
changes in stock prices.
• The chance of margin call is always prevailing.
• You are always obligated to keep a minimum account –
the maintenance margin.
• With falling stock prices the traders have much less
• Basic Margin Formula
• Example of Using Margin
Value of securities − Debit balance
Value of securities
V − D
V − D
$6,500 − $1,200
= 0.815 = 81.5%
from a margin
Amount of equity at purchase
• Return on Invested Capital
If stock price falls to $60 per share,
Stock $60,000 Borrowed $35,000
Margin (%) = Equity in account / Value of stock
= $25,000 / $60,000 = 41.67%
Rate of return = (25,000 – 35,000)/35,000 = -28.57%
Rate of return if own money of $35,000 is used to buy
= (30,000 – 35,000) / 35,000 = –14.28%
How far can the stock price fall before
getting a margin call?
Margin (%) = Equity in account / Value of stock
40% = (1,000P - $35,000) / 1,000P
∴ P = $58.33
If stock price falls below $58.33, one gets a
Settlement of Contracts
Settlement of securities is a business
process whereby securities or interests
in securities are delivered, usually
against (in simultaneous exchange for)
payment of money, to
fulfill contractual obligations, such as
those arising under securities trades
Types of Settlement
1. Account period settlement or weekly
settlement: On NSE trading period is fixed
i.e., from Wednesday to Tuesday.
2. Rolling settlement: currently T+2 system is
Settlement days and Delivery
In India the settlement days for marketable stocks is usually
2 business days after the trade is executed, and for listed
options and government securities it is usually 1 day after
The settlement cycle in India is T+2 days.T+2 means the
transactions done on the Trade day, will be settled by
exchange of money and securities on the second business
day (excluding Saturday, Sundays, Bank and Exchange
Trading Holidays). Pay-in and Pay-out for securities
settlement is done on a T+2 basis.
As part of performance on the delivery obligations entailed
by the trade, settlement involves the delivery of securities
and the corresponding payment.
Settlement trade days in India
Instrument Days to Settle in India
Stocks 2 (2 days after trade date or "T + 2")
Typically 1 ("T + 1" or "next day"),
though can be 0 ("same day")
Regular business days from trade date;
dates/terms to settle instruments
Between 2002 –till date rapid progress
in market reforms
Settlement cycles shortened to T+3
in April 2002, to T+2 in April 2003
Derivatives products expanded –
to include single stock options and
futures. The market picked up
Margining system in cash and
derivatives – VaR based and real
Risk management refined
Sharing the Indian ExperienceSharing the Indian Experience
The processThe process
The objectives of the reforms
in the securities settlement systems –
Reduction and mitigation of systemic,
structural and operational risks
Increase speed of transaction, execution
and settlement of trade and facilitate
Quicker settlement of transactions with finality
Safety of the settlement process
Reduction of transaction costs and thereby
Make market more efficient and transparent
for investors and participants
Sharing the Indian Experience
Current market structure
Risks Involved in Settlement
A number of risks arise for the parties during
the settlement interval, which are managed
by the process of clearing, which follows
trading and precedes settlement.
Clearing and settlement is a post trade
activity therefore market risks in the future.
Clearing involves modifying those
contractual obligations so as to facilitate
settlement, often by netting and novation.
Nature of Settlement
Settlement involves the delivery of securities
from one party to another. Delivery usually
takes place against payment, but some
deliveries are made without a corresponding
payment (sometimes referred to as a free
Examples of a delivery without payment are the
delivery of securities collateral against a loan of
securities, and a delivery made pursuant to
a margin call.
Types of Settlement
Traditional (physical) settlement
Prior to modern financial market technologies
and methods such as depositories and securities
held in electronic form, securities settlement had
involved the physical movement of paper
instruments, or certificates and transfer forms.
Payment was usually made by paper check upon
receipt by the registrar or transfer agent of
properly negotiated certificates and other
Types of Settlement (cont,d)
Physical settlement securities still exist in
modern markets today mostly for private
(restricted or unregistered) securities as
opposed to those of publicly (exchange) traded
securities, however payment of money today is
typically made via electronic fund transfers .
Physical/paper settlement involves higher risks,
inasmuch as paper instruments, certificates, and
transfer forms are subject to risks electronic
media are not more or less such as loss, theft,
counterfeit, and forgery
The electronic settlement system came about largely as a
result of Clearance and Settlement Systems in the World's
Securities Markets, a major report in 1989 by the
Washington-based think tank, the Group of Thirty.
In an electronic settlement system, electronic settlement
takes place between participants. If a non-participant
wishes to settle its interests, it must do so through a
participant acting as a custodian.
The interests of participants are recorded by credit entries
in securities accounts maintained in their names by the
operator of the system. It permits both quick and efficient
settlement by removing the need for paperwork, and the
simultaneous delivery of securities with the payment of a
corresponding cash sum (called delivery vs payment, or
DVP) in the agreed upon currency.
After the trade and before settlement, the rights
of the purchaser are contractual and
therefore personal . Because they are merely
personal, their rights are at risk in the event of
the insolvency of the vendor. After settlement,
the purchaser owns securities and their rights
Settlement is the delivery of securities to
complete trades. It involves upgrading personal
rights into property rights and thus protects
market participants from the risk of the default of
Settlement - Auction
Incase there is a shortage in Pay-in of
shares at the time of settlement on T+2,
the Stock Exchange purchases the
requisite quantity in the Auction
Market and gives them to the buying
Settlement - Close Out
If the shares could not be bought in the
auction i.e. if shares are not offered for
sale in the auction, the transactions are
closed out as per SEBI guidelines
The settlement in the securities market is
done on a T+2 Rolling Settlement Cycle
(where T = Trading Day).
T + 2