Assume trading on MIS stocks. There is 5x leverage.
When leverage is dried out everywhere, this MIS things seems to have remained the same for quite some time. (Please correct me if I am wrong on this).
The regulator does not seem to pay attention to it.
Why so ? Is it because of being the main revenue generator for brokers ? Or…
Is it because MIS stock trading is safer ?
Well, there is 5x leverage involved and nobody is even interested in referring to it as ‘safe’.
What gives a broker comfort to continue offerring such a product ?
Also have a few more doubts on MIS. Appreciate your feedback. Thanks
Does the MIS leverage remain constant during the day ?
Does Zerodha/Any broker guarantee that the position will be squared off when approaching 20% down for the day when no additional money is added to account?
What happens if trader/broker is unable to square off before market close ? Reason could be upper circuit.
Assuming the account has no holdings other than just enough cash to make MIS long trades, what is the result of inability to square off the long positions before market close in following situations.
a. Upper circuit/market halt
b. Lower circuit/market halt
Can’t speak to the broker or their intentions(@siva can probably answer that). But the last two questions. If a position can’t be closed, You’ll be forced to carry overnight positions. The full amount(without leverage) needed will be deducted from your account and you’ll have negative balance. You’ll have to pay interest on the negative balance + actual share losses, whenever broker can sell your positions(i.e., when circuit opens).
I don’t think broker can legally sell your holdings. But, if sold(by you or anyone else), it’ll cover the negative balance first. So you can’t take that money either. The above doesn’t hold true, if stocks are pledged. Pledged holdings can be legally sold by broker anytime to cover, if there’s a negative balance. This is called a margin call. Though, zerodha staff here havea “unwritten” rule, that they only sell if margin drops below 60%
Official:
Your positions will be squared off at the discretion of Zerodha if you don’t add the required funds within the specified time.
Interest is usually 18%pa in this case.
Margin penalty:
Not sure if there will be margin penalty, since it becomes a CNC trade.
Unwritten word of mouth:
That is if it is 60% of value of pledged holdings or cash available. Ofc, if there’s nothing to square off and stock can’t be sold, you’ll be paying interest as “Delayed payment charge”(along with margin penalty if any.)
While looking at extreme cases is fine ( say stops cancelled and cannot send ), a warning just in case - dont trade in such a way that the 5x leverage can wipe out capital in a single day at say -20% for a stock.
Ideally atleast diversify into a basket of trades
Also, brokers used to offer 50x or so until SEBI forced reduction to max 5x now. Zerodha used to give less back then, not sure maybe 10x?
That was a good move. But go too far and it will hinder trading. Equity already has lower liquidity.
Would margin penalty apply in this case(Buy and LC)? It becomes a forced CNC trade and I think margin penalty don’t apply and only delayed payment charges will apply. Am I right?
