MUMBAI: It is a vicious circle, but could take a while before the market manages to break free of it. As stock prices continue their slide, jittery traders are unwinding their long positions, in turn driving prices further down. Large traders are having trouble meeting their mark-to-market obligations, as the value of their shares pledged as collateral with brokers continues to shrink. With the market yet to show any signs of stabilising, these traders are liquidating their positions rather than holding on by replenishing the margins.
Many high net worth individuals (HNIs) had built fresh positions using the current holdings in their portfolio, as margin. Brokers provide funds to these HNIs against the stocks pledged as collateral. If a client is holding any stock which is part of the eligible securities available for funding, he can use his current holding to take further exposure to new stocks.
For example, if a client holds Reliance Industries stock worth Rs 50 lakh, his broker would allow him to take fresh positions of up to Rs 25 lakh in another stock. Of course, the client will be charged interest on this money. If the value of the pledged shares fall, the client will have to make up for that difference either by way of pledging more shares or through cash. This arrangement is dependant on the creditworthiness of the client and his relationship with the broker. Market participants aver of late, many brokers have stopped funding clients.
“The fall since January has been unprecedented in the history of the market, and most HNIs have seen a severe erosion in their portfolios,” says India Infoline VP-HNI Desk Ketan Malkan. “As a result, their ability to hold on to positions for a longer duration has been dented,” he added.
There is a perception that many clients who had earlier been waiting for recovery and paying their mark to market margins, have resorted to selling. This is however client specific. “If the client thinks that his positions pose higher risks, he would prefer to sell, rather than meeting daily obligations,” says a broker.
Bajaj Capital CEO and director Anil Chopra says that the impact of this kind of selling by HNIs has a spiralling effect on the markets. “We are witnessing this kind of selling even by institutional players where they had to sell off or reduce their exposure to Indian equity markets due to problems on their home turf. Similarly, in order to meet their obligations, HNIs are also selling if the position requires additional margins. This is largely in case of those HNIs that had earlier leveraged to make a quick buck.”
Mr Chopra is of the view that HNIs with a long-term view should not sell at these levels, if they do not have genuine requirement of funds. The markets have already fallen substantially and at these levels there seems to be more upside than downside.
Many high net worth individuals (HNIs) had built fresh positions using the current holdings in their portfolio, as margin. Brokers provide funds to these HNIs against the stocks pledged as collateral. If a client is holding any stock which is part of the eligible securities available for funding, he can use his current holding to take further exposure to new stocks.
For example, if a client holds Reliance Industries stock worth Rs 50 lakh, his broker would allow him to take fresh positions of up to Rs 25 lakh in another stock. Of course, the client will be charged interest on this money. If the value of the pledged shares fall, the client will have to make up for that difference either by way of pledging more shares or through cash. This arrangement is dependant on the creditworthiness of the client and his relationship with the broker. Market participants aver of late, many brokers have stopped funding clients.
“The fall since January has been unprecedented in the history of the market, and most HNIs have seen a severe erosion in their portfolios,” says India Infoline VP-HNI Desk Ketan Malkan. “As a result, their ability to hold on to positions for a longer duration has been dented,” he added.
There is a perception that many clients who had earlier been waiting for recovery and paying their mark to market margins, have resorted to selling. This is however client specific. “If the client thinks that his positions pose higher risks, he would prefer to sell, rather than meeting daily obligations,” says a broker.
Bajaj Capital CEO and director Anil Chopra says that the impact of this kind of selling by HNIs has a spiralling effect on the markets. “We are witnessing this kind of selling even by institutional players where they had to sell off or reduce their exposure to Indian equity markets due to problems on their home turf. Similarly, in order to meet their obligations, HNIs are also selling if the position requires additional margins. This is largely in case of those HNIs that had earlier leveraged to make a quick buck.”
Mr Chopra is of the view that HNIs with a long-term view should not sell at these levels, if they do not have genuine requirement of funds. The markets have already fallen substantially and at these levels there seems to be more upside than downside.
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