 "Tipping Point: What are the new rules for margin funding?")
What are the new rules for margin funding?
The new rules, introduced by the Securities and Exchange Board of India, say that if an investor wishes to do margin-based trading, he doesn't have to put up cash. He can now pledge his stock portfolio with the broker instead and buy shares worth four times the value of the pledged portfolio.
Should you take advantage of this change?
Retail investors should avoid leveraged trading. If the stock falls instead of rising or vice versa, the broker will make a margin call. He, then, will seek more deposit money or he will sell the stocks in your account. When you buy a stock using your own money, you can hold on to it and losses are notional. If the stock rebounds later, losses can turn into profits. But if you buy on margin, and the broker sells off the stocks, you end up booking losses.
The new rules, introduced by the Securities and Exchange Board of India, say that if an investor wishes to do margin-based trading, he doesn't have to put up cash. He can now pledge his stock portfolio with the broker instead and buy shares worth four times the value of the pledged portfolio.
Should you take advantage of this change?
Retail investors should avoid leveraged trading. If the stock falls instead of rising or vice versa, the broker will make a margin call. He, then, will seek more deposit money or he will sell the stocks in your account. When you buy a stock using your own money, you can hold on to it and losses are notional. If the stock rebounds later, losses can turn into profits. But if you buy on margin, and the broker sells off the stocks, you end up booking losses.
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