Suppose the price of a stock is 400, I have 40000 in my free cash and zerodha provides ten times margin on this stock. So, If I do MIS trade, I’ll be able to buy 1000 shares with the money I have i.e. Worth 4,00,000. Now, I only had rs. 40,000 but am able to buy 4,00,000 rs. Worth of shares. So that means zerodha is providing me 3,60,000 as a loan.
Now suppose the price of that stock comes to 350 before 3.20 pm. This would mean that my shares are only worth 3,50,000 rs. Now. What this means is that I have lost all my 40,000 rs. that I had but this would also mean that zerodha has also lost rs. 10k in this process?
So my question is - is this possible? Why does zerodha risk its money?
The risk is very less when compared to the reward that zerodha gets from its clients.
The scenario which you posted is rare, there is a risk management system running which will automatically squareoff your position when your net loss touches 80% of your original capital i.e. 32000.
In volatility days, price may jump, even the RMS may not able to squareoff within that limit, that’s why leverage is removed during high volatility days. Note, leverage is given only on most liquid stocks means less risk to broker.
If the leverage is removed, then most of the brokerage’s will shutdown.
Yep possible, every leveraged product comes with this risk. Not just intraday equity, but also futures and option shorting. Offering leverage on intraday equity has been a norm because traditionally brokers earned a % fees, so higher the leverage, higher the brokerage generated. This brokerage ideally would have compensated for the additional risk taken.
In a flat fees pricing model like ours, the incremental risk taken doesn’t add up as what is earned remains the same. But since all traders expect the intraday leverage, we have continued to offer them.
Btw, if you lose more than your 40k, you are expected to make good of the additional losses.
Thanks for the reply. But can you please elaborate your last line. It’s a bit unclear. Does it mean that I will have to pay zerodha if I lose any more than 40k? Actually, I was under the impression that as soon as my 40k vanishes, zerodha will square off my position as it won’t want any loss for itself. Is this not the case? Does Zerodha not square off automatically once client’s money is gone and any loss further from this point would mean zerodha’s loss?
Yes, if you lose more money than what is in your account, you are required to make up for the additional losses. The auto square off feature works in a normal market. But assume you are trading a stock which has 10 times leverage (100 shares, with Rs 1000 in your account) and the stock falls 20% in one second from Rs 100 to Rs 80. We can now only square it off at Rs 80, so there would be Rs 2000 loss in all, with you having only Rs 1000 in your account. So you end up with negative balance of Rs 1000.
These kind of moves keep happening once in a while, like you must have seen with some of these NBFC’s in the last month.