Starting 01 April 2018, we unfold a new chapter of trading in the Indian stock market where commodity trading and equity clients can trade with a single entity.
Let’s understand the history/background of this new chapter.
The Indian derivatives market is divided between equity, currency & commodity market where
- Equity & Currency market was regulated by SEBI and
- The commodity market was regulated by forwarding Market Commission (FMC).
Arun Jaitley (Finance Minister of India) during the budget presentation of 2015 proposed SEBI as the single regulator of equity, currency & commodity derivatives market and as a result, SEBI on 28 Sept 2015 took charge as the single regulator.
SEBI being a single regulator on Sept 2017 proposed trading in equity and commodity trading market via a single entity.
So what is in to for Traders??
Current Scenario
Individuals who trade in both equity and commodity market have to transfer money to 2 companies (one of equity & other of a commodity) and this was a huge constraint as it would result in regular transfers between these accounts which were time-consuming, costly, required more working capital & lastly inefficient use of funds – loss of opportunity which is of great importance in Equity and Commodity market with movements happenings in split seconds.
Let’s look at the below scenarios for a better understanding:
Buy Scenario:
Mr. A has Rs. 60,000 in a savings account and intends to trade in equity and commodity. So he has divided the amount and transferred Rs. 20,000 to equity account and the remaining Rs. 40,000 to his commodity account.
Next day due to an uptrend in the equity market he intends to buy shares worth Rs. 25, 000 but is limited to the amount available in his equity account of Rs. 20, 000. So in order to buy the shares, he will have to conduct an additional transfer of Rs. 5,000 from his commodity account to equity account.
Margin Scenario:
Mr. B has Rs. 1, 60,000 in saving account and intends to trade in equity and commodity. This time rather than dividing and transferring the amount between equity and commodity account he can transfer the complete Rs.1, 60,000 to a single all in one margin account.
He has entered into 2 open positions where one is in equity and the other in a commodity. The margin requirement for both these positions is Rs. 80, 000 each so a total of Rs.1, 60,000.
Suppose at end of the day he faces a loss of Rs. 30, 000 on his commodity open position and a profit of Rs. 50, 000 on his equity open position. So his end of the day all in one margin account balance would be Rs.1, 80,000 (1, 60, 000 + 50, 000 – 30, 000.)
In the above scenario, he can safely carry forward both his equity and commodity positions to the next day as he has sufficient ledger amount to meet his margin requirement.
Intraday Scenario
Mr. C has Rs. 1, 60,000 in a savings account and intends to trade in equity and commodity. Since the visions a great opportunity in BankNifty he transfers the complete money to the equity account.
As visioned he made a profit of Rs. 40,000 on his intraday trade. So his total equity account balance is Rs. 2, 00, 000 (1, 60, 000 + 40, 000). He intends to transfer this money to his commodity account for trading in Crude-oil but can’t since it is not possible to transfer money from equity margin account to commodity margin account within a day.
So, as a result, he will lose an opportunity which is of great importance in the stock market.
So he has divided the amount equally and transferred Rs. 80,000 to equity account and the remaining Rs. 80,000 to his commodity account.
The transfers in the above scenarios between equity and commodity account will cause him additional money i.e transfer charges and don’t forget the additional time and inconvenience.
In the New Scenario
SEBI has allowed trading in equity and commodity market via a single entity. So brokers who provide equity and commodity trading facility can integrate both their companies into one entity which will allow traders to trade in equity and commodity via a single company thus a single margin account.
Let’s recall both the before scenarios and see the benefits of this change
Buy Scenario:
Mr. A has Rs. 60,000 in saving account and intends to trade in equity and commodity. This time rather than dividing and transferring the amount between equity and commodity account, he can transfer the complete Rs. 60,000 to a single all in one margin account.
Next day due to an uptrend in the equity market he intends to buy shares worth Rs. 25, 000 but this time he can easily buy those shares as the complete money is in all in one margin account.
Margin Scenario:
Mr. B has Rs. 1, 60,000 in saving account and intends to trade in equity and commodity. This time rather than dividing and transferring the amount between equity and commodity account he can transfer the complete Rs.1, 60,000 to a single all in one margin account.
He has entered into 2 open positions where one is in equity and the other in a commodity. The margin requirement for both these positions is Rs. 80, 000 each so a total of Rs.1, 60,000.
Suppose at end of the day he faces a loss of Rs. 30, 000 on his commodity open position and a profit of Rs. 50, 000 on his equity open position. So his end of the day all in one margin account balance would be Rs.1, 80,000 (1, 60, 000 + 50, 000 – 30, 000.)
In the above scenario, he can safely carry forward both his equity and commodity positions to the next day as he has sufficient ledger amount to meet his margin requirement.
Intraday Scenario
Mr. C has Rs. 1, 60,000 in a savings account and intends to trade in equity and commodity. Since the visions a great opportunity in BankNifty he transfers the complete money to his new all in one account.
As visioned he made a profit of Rs. 40,000 on his intraday trade. So his total all in one account balance is Rs. 2, 00, 000 (1, 60, 000 + 40, 000). He intends to trade in Crude-oil and unlike the old scenario, he can trade immediately and not depend on any transfer or any other resort and most importantly won’t lose an opportunity which is of great importance in the stock market.
So, with the new, all in one margin account he need not like before transfer money between equity and commodity account and this will save the additional money i.e. transfer charge and also the additional time and inconvenience.
Welcome to the new chapter of trading!
Also Read: Understanding Dabba Trading: Risks and Legal Implications in India
