If you were to buy stocks with 100% money in your account, or if you were to sell stocks which are sitting in your demat account, there is no risk we or any brokerage firm would take. This is one of the reasons why we don’t charge any commissions on equity delivery trades.
For all other trades - intraday equity with leverage using MIS/BO/CO, or MIS/NRML on F&O, there is a significant risk a brokerage firm takes. The margin asked from a client is to mitigate this risk to whatever extent possible.
Let me explain with an example of the stock price of PC Jewellers stock price on 2nd Feb (I know it is exaggerated on that day, but still so that you can all keep the risk brokerage takes in your mind).
The stock opened at 460, went down all the way to around 220 and bounced back to around 400. All within minutes.
Assume the intraday MIS margin at the start of the day was 5X and about 8X for CO/BO. This means, with Rs 1lk, you could have bought stocks worth up to Rs 5lks. So around 1080 shares (Rs 460 was the stock price).
The stock suddenly fell 200 points, which would mean a loss of Rs 2.2lks if the client exited. But the client has placed only Rs 1lk with us. What about the rest Rs 1.2lks? This has to be given to the exchange by end of the day. If the client doesn’t transfer, it is the responsibility of the brokerage to pay the exchange.
These potential losses get crazier when it comes to CO/BO, as the leverage is much higher than that of MIS orders. Leverage is higher for CO/BO because there is a pending SL in the system. But when stocks fall off a cliff, the stop loss will trigger only at the market price available.
It is the same with futures and options. Inherently all F&O contracts are already leveraged. MIS/BO/CO order types add more to it.
All brokerages offer leverage to the trading community knowing the risks being taken. Risks shouldn’t be compromising for business. A lesson many brokerages have learnt in the past going bankrupt after leveraging and allowing their clients to do the same excessively.
This is the same reason we might block trading in bracket or cover orders on extreme volatile days as the leverages they offer intrinsically is a lot more. Yes, there is a standing stoploss in these orders, but like I explained earlier, these are of no use if markets suddenly move up or down.
As a business, we are quite conservative in terms of risk. Whenever we believe there is increased volatility, the margin requirement goes up automatically. This is to ensure that there are enough funds to cover any losses that any client can create (not possible to do completely, but whatever we can). If we don’t do this, we will be taking a systemic risk with all our other clients.