Margin Trading
Margin trading consists of buying securities with funds partially provided by the broker or selling securities partially provided by the broker. When buying securities on margin, the client pays only a part of the cost of the transaction with his own funds, while the rest of the money is lent by the broker. When selling securities (sale "without coverage" or "short" sale), the client borrows securities from the broker and sells them in the market. Then he pays the loan with these securities, which he buys later. Thus, marginal trading enables the investor:
- to use a larger volume of funds when buying securities (by borrowing funds from the broker);
- to get profit when the market price of the stock decreases (by borrowing securities from the broker).
The broker credits the investor against pledge of funds and/or securities kept in the investor's account with the broker. The investor can carry out operations in securities and funds which are pledged. Besides funds, a broker can accept (as coverage of the client's loan commitments) securities which meet the requirements established for putting securities on "A"1 quotation list of the organizer of trading in the securities market. A broker gives his clients a right to carry out marginal transactions at his own discretion. A broker can refuse to provide this service to a client.
Marginal trading is held only on a stock exchange and/or through other organizers of trading in the securities market, which hold the appropriate license, granted by the Federal agency regulating the securities market. Organizers of trading in the securities market (including stock exchanges) provide to the Federal agency information on the results of marginal transactions, prepared on the basis of documents received from participants in trading in the order established by the organizers of trading.
Thus, a client can buy more securities than his funds allow him at the expense of funds provided by a broker. The passive balance, which appears in the client's cash account, must be less than the market value of the pledged securities.
A client can also sell more securities than he has in his account at the expense of securities provided by the broker. The passive balance of securities, which appears in the client's account, must be less than the market value of the pledged securities and the funds available in the client's account.
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MICEX Stock Exchange
