FIN – 309
Capital Market Operation – lecture 13
Learning Outcomes
• To understand about the concept of margin
trading.
• To understand the concept of basket trading.
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Introduction
• In the stock market, margin trading refers
to the process whereby individual
investors buy more stocks than they can
afford to.
• Margin trading also refers to intraday
trading in India and various stock brokers
provide this service.
• Margin trading involves buying and selling
of securities in one single session.
• Over time, various brokerages have
relaxed the approach on time duration.
• A margin account provides you the
resources to buy more quantities of a
stock than you can afford at any point of
time.
• For this purpose, the broker would lend
the money to buy shares and keep them
as collateral.
How margin trading works
• In order to trade with a margin account,
you are first required to place a request
with your broker to open a margin account.
• This requires you to pay a certain amount
of money upfront to the broker in cash,
which is called the minimum margin.
IM and MM
• Once the account is open, you are
required to pay an initial margin (IM),
which is a certain percentage of the total
traded value pre-determined by the broker.
• Before you start trading, you need to
remember three important steps.
– First, you need to maintain the minimum
margin (MM) through the session, because on
a very volatile day, the stock price can fall
more than one had anticipated.
• For example, if a Tata Steel stock priced at Rs
400 falls 4.25 per cent and the IM and MM are 8
per cent and 4 per cent of the total value of the
shares bought, respectively, then the trade-off
8%-4.25%=3.75% will be less than the MM. In
this case, you will either have to give more
money to the broker to maintain the margin or
the trade will get squared off automatically by
the broker.
Alternatively
• Secondly, you need to square off your
position at the end of every trading
session. If you have bought shares, you
have to sell them. And if you have sold
shares, you will have to buy them at the
end of the session.
• Thirdly, convert it into a delivery order after
trade, in which case you will have to keep
the cash ready to buy all the shares you
had bought during the session and to pay
the broker’s fees and additional charges.
If even one of these steps is missed, the
broker will automatically square off the
position in the market.
Basket Trading
• Basket trading is a type of trading that
simultaneously trades a group of different
securities.
• The term specifically defines the trading of
at least 15 securities at once. However,
there may be much larger basket trades
that involve dozens of securities.
• Exchange-traded funds (ETFs) are set up
to mirror the performance of a stock
market index. Exchange-traded funds
hold baskets of stocks that represent stock
indexes.
• Most indexes add or remove shares only
when the underlying index changes. This
low turnover is more tax efficient for
investors who will avoid the regular capital
gains taxes from annual distributions by
conventional mutual funds.
Demonstration on SBI Smart
Mutual Funds vs ETF’s
•Mutual funds usually are actively managed
to buy or sell assets within the fund in an
attempt to beat the market and help
investors profit.
•ETFs are mostly passively managed, as they
typically track a specific market index; they
can be bought and sold like stocks.
•Mutual funds tend to have higher fees and
higher expense ratios than ETFs, reflecting, in
part, the higher costs of being actively
managed.
•Mutual funds are either open-ended—trading
is between investors and the fund and the
number of shares available is limitless; or
closed-end—the fund issues a set number of
shares regardless of investor demand.
Rolling Settlement
• A rolling settlement is the process of settling
security trades on successive dates based upon
the specific date when the original trade was
made so that trades executed today will have
a settlement date one business day later than
trades executed yesterday.
• This contrasts with account settlement, in
which all trades are settled once in a set
period of days, regardless of when the
trade took place.
End of Lecture
Thank you