would enable you to enjoy an array of other services such as Member Rankings, User Groups, Own Posts & Profile, Exclusive Research, Live Chat Box etc.. 
Home
By. R.M.B. Senanayake:
The Colombo Stock Exchange had allowed broker firms to extend credit up to 50% of the value of the portfolio of a client. The broker firms acted under this rule but they failed to enforce the maintenance margin as is done by broker firms the world over.
When the value of the portfolio falls broker firms are required to make a margin call which must be met within 24 hours. The amount of the margin call is determined by the fall in the value of the portfolio below the leverage limit permissible.
Suppose a client has Rs 10020 in cash or securities in his account. He wants to buy stock up to Rs 20,000. He will be lent Rs 10,020 by the broker firm since the Stock Exchange limits such credit to a maximum of 50%. Say he buys a stock which is priced at Rs 15. He will buy 1332 shares. Suppose the stock falls in value to Rs 10 then his portfolio value has fallen to Rs 13,320 and he can borrow only Rs 6660 against it. So he is short by Rs 3320. He has failed to maintain the maintenance margin and must bring in cash or securities worth Rs 3320 in 24 hours. If he fails to do so the broker firm will sell 332 shares out of the 1332 shares he purchased. He will not sell the entire amount of 13,320 shares in his portfolio to recover the Rs 3320 to make up the margin. He will still hold 1000.
Today without the benefit of margin trading the broker firms are required to sell the whole quantity of 1332 shares he bought if he doesn’t pay by T+5 settlement day.
The SEC Rule banning credit by broker firms’ has thrown the baby out with the bathwater, It is better to allow the broker firms to recover only the shortfall from the 50% value of the portfolio. Of course this means the SEC will have to allow margin trading facility to broker firms.
The Writer works as a General Manager for a Colombo based Stock Brokering firm.
http://www.news360.lk/featured/why-not-margin-trading
The Colombo Stock Exchange had allowed broker firms to extend credit up to 50% of the value of the portfolio of a client. The broker firms acted under this rule but they failed to enforce the maintenance margin as is done by broker firms the world over.
When the value of the portfolio falls broker firms are required to make a margin call which must be met within 24 hours. The amount of the margin call is determined by the fall in the value of the portfolio below the leverage limit permissible.
Suppose a client has Rs 10020 in cash or securities in his account. He wants to buy stock up to Rs 20,000. He will be lent Rs 10,020 by the broker firm since the Stock Exchange limits such credit to a maximum of 50%. Say he buys a stock which is priced at Rs 15. He will buy 1332 shares. Suppose the stock falls in value to Rs 10 then his portfolio value has fallen to Rs 13,320 and he can borrow only Rs 6660 against it. So he is short by Rs 3320. He has failed to maintain the maintenance margin and must bring in cash or securities worth Rs 3320 in 24 hours. If he fails to do so the broker firm will sell 332 shares out of the 1332 shares he purchased. He will not sell the entire amount of 13,320 shares in his portfolio to recover the Rs 3320 to make up the margin. He will still hold 1000.
Today without the benefit of margin trading the broker firms are required to sell the whole quantity of 1332 shares he bought if he doesn’t pay by T+5 settlement day.
The SEC Rule banning credit by broker firms’ has thrown the baby out with the bathwater, It is better to allow the broker firms to recover only the shortfall from the 50% value of the portfolio. Of course this means the SEC will have to allow margin trading facility to broker firms.
The Writer works as a General Manager for a Colombo based Stock Brokering firm.
http://www.news360.lk/featured/why-not-margin-trading
