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MC Learn Fundamental Investing | What are margins and why do brokers charge them?

In this chapter, we look at the process of buying and selling, the different types of margins that brokers collect from clients, and grievance redress systems.

June 28, 2022 / 12:52 PM IST

Module 1, chapter 5: In this chapter, we look at the process of buying and selling, the different types of margins that brokers collect from clients, and grievance redress systems.

Q: What is the process for paying for shares bought and receiving payment for shares sold?

A: When you buy shares through an offline broker, you must pay the broker on the following day. The day after the payment is made, the shares will be credited into your account.

Similarly, when you sell shares, you have to hand over the shares to your broker the following day. You will receive the payment for those shares a day later.

If you are transacting online, you need to make the payment at the time of placing the order to buy shares.

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Q: Do I need to keep some money as deposit with the broker?

A: It is not mandatory. However, as a precautionary measure, some brokers insist that a client should keep a deposit. That is because once a broker executes a buy order on behalf of a client, the broker has to make the payment to the stock exchange, whether or not the client pays him. Also, in the past, it would take a couple of days for a client’s cheque to be cleared and the money credited into the broker’s account.

Q: My friend who deals in stocks says that his broker charges him margins. What are margins and why do brokers collect them?

A: Stock exchanges collect margins as a safeguard against potential defaults by brokers’ clients. The exchange has a mathematical way of calculating margins that a broker is supposed to collect from clients. The margins collected vary, depending on whether it is a cash market transaction or a futures and options (F&O or derivatives) transaction.

There are different types of margins that make up the final margin.

The two main margins are the SPAN margin, which stands for Standardised Portfolio Analysis of Risk, and the Exposure margin. The SPAN margin determines the margin requirement using a complex algorithm to determine a one-day risk for a trader’s account. The SPAN margin for every stock and index is different and keeps changing even during a single day, especially if volatility is high.

The Exposure margin, on the other hand, is constant and is collected to protect the broker from excessive volatility and client defaults.

In addition to this, the exchanges charge ad-hoc margins that are collected ahead of special events like the budget or elections in anticipation of high volatility.

Apart from these, there is something known as the mark-to-market margin. When a trader has an outstanding position, there is a notional profit or loss at the end of the day. If the position shows a profit, the client does not have to pay additional margins. But if the position shows a loss, the client has to pay a mark-to-market margin to the extent of the loss.

Q: Are margins refundable?

A: Margins are refundable once the transaction is complete.

Q: Is it possible for a broker to cheat his clients? If so, how?

A: The market regulator has enforced norms that make it difficult for a broker to cheat clients. As soon as a trade is executed, the client should get an SMS message on his mobile. This way, he can confirm the rates and quantities that were transacted are the same as the ones he had asked the dealer to carry out.

However, there are cases of clients complaining to the regulator that the broker made the customer buy shares, which later declined in value. Unless the broker did this with mala fide intent, the regulator can do little about this.

Another common complaint is of brokers transferring funds and shares out of their accounts without informing them. There are instances when the broker does not credit the funds or shares within the mandatory deadline.

Q: What precautions should I take so that my broker does not cheat me?

A: Keep track of all your transactions. Regularly monitor your demat account for shares as well as dividends that your portfolio companies announce. Check your contract notes for proper signature and seals. Ensure that you regularly get statements of your trade and demat account.

In case of any delay, ask for an explanation from the broker. If you are not satisfied with the reply you can take it up with the market regulator.

Q: If I am still cheated by my broker, who can I complain to?

A: If you have a complaint against a broker, visit the website Sebi Complaint Redress System (SCORES), https://scores.gov.in/, and file your grievance. You will be asked to upload documentary proof you have against the broker. Sebi will then seek a response from the broker.
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first published: Jun 28, 2022 12:52 pm
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