Zebu blog

Tag: Margin Requirements

  • How Does Short Selling Work In The Indian Share Market?

    When an investor sells shares he does not own, this is called “short selling.” In a short sale, a trader borrows shares from the owner with the help of a brokerage. The trader then sells the shares at market value, hoping that prices will go down. The person who sells short buys the shares at a loss and makes money when the prices go down. It’s important to know that short selling is done by experienced traders and investors who think that the price of shares will go down before they are returned to the owner. Short selling has a high risk-to-reward ratio because you could make or lose a lot of money.

    Information about short sales:

    1. In a short sale, the seller does not own the stock that is being sold. They are borrowed from someone else.

    2. Both individual investors and large groups of investors can do short sales.

    3. Short selling is based on guessing what will happen.

    4. The seller bets that the price will go down by using short selling. If prices go up, the seller will lose money.

    5. Traders have to do what they have to do and give the shares back to the owner when the trade is settled.

    6. It’s important for investors to know that the deal is a short sale.

    7. Most of the time, short selling happens when the market is down and the price drop is big.

    On the stock market, a short sale is done when people want to make money quickly. Some people say it’s like holding on to stocks for a long time. Long-term investors buy stocks with the hope that their prices will go up in the future. Short-sellers, on the other hand, watch the market and profit when prices go down.

    How does the short sale process work?

    Pros of short-selling:

    Financial experts have had a lot to say about the benefits of short selling. Even though this approach has been criticised, market watchdogs all over the world support it because it helps fix irrational overpricing of any stock, provides liquidity, stops bad stocks from rising quickly, and makes sure promoters can’t change prices.

    Short-selling disadvantages

    Short-selling is an illegal practice that market manipulators often use to raise stock prices artificially. Because of this, there is a higher chance of market instability and more volatility. The planned drop in stock prices could hurt the company’s confidence and make it harder for them to raise money.

    A “naked short sell” when a trader sells shares without borrowing them or making plans to borrow them. If the trader doesn’t borrow the shares before the clearing time, he or she can’t give them to the buyer. The trade is said to have “failed to deliver” if the trader doesn’t close the position or borrow the stock. Since it goes against the laws of supply and demand, naked short selling is illegal in most countries. If a large number of naked short sales are made, the market can become unstable.

    Short selling is not a good idea for new traders and gamblers who don’t understand the risks. Short selling should only be done by people who know a lot about how the market works.

  • What Exactly Are VAR And SPAN Margins?

    VaR and SPAN margins are related to every position you take in the stock market, especially if you trade in FnOs. But what exactly are they and how can you calculate them?

    Here’s everything you need to know.

    VaR is a way to measure the risk of a loss. Value-at-risk, or VaR, is a way to measure the downside risk or potential loss of a portfolio or investment over a certain amount of time. It helps analyse and estimate how much the minimum loss can be with a certain amount of confidence. Essentially, it is a number that tells you how risky a portfolio is.

    For example, VaR can tell us that an investor can expect to lose at least 2% of the total value of their portfolio on 1 out of every 15 days. So, it helps figure out how much money could be lost, how likely it is to lose that much money, and how long it could take.

    Statistical simulations can be used in a number of ways to figure out VaR. The risk management department of a company keeps a close eye on this parameter and tries to make sure that extremely risky trades are not taken.

    Margin SPAN

    On the equity markets, traders also need to have a certain amount of money set aside as “margin money” to help cover trade losses. But it is hard to guess how much of a margin is needed to cover all the losses if the market shows the worst-case scenario. As a result, the SPAN, which stands for Standardised Portfolio Analysis of Risk, is a standard way for traders to figure out how much margin money they need.

    When figuring out margin amounts for every single position, the SPAN system uses complicated algorithms and machine learning techniques. Each margin amount is equal to the most a single account can reasonably lose in a single trading day. It was made by the CME in 1988, and more than 50 exchanges around the world use SPAN as their official way to figure out how much margin they need. This margin is different for each security because each one comes with a different level of risk. For example, the SPAN margin for a single stock will be higher than that for an Index because single stocks are more risky and volatile.

    Risk management

    Every trader who is successful knows how important it is to manage risk, which is even more important than making money. With the help of VaR and SPAN calculations, a trader can keep a large number of contracts in their portfolio and stay away from serious margin calls.

    More brokers and financial institutions are now focusing on better ways to handle risks. Many of them require that, in addition to SPAN margin, which is collected when trades are started, an additional margin called Exposure margin to be collected to protect against liabilities caused by wild swings, rogue trades, or reactions to extreme stress in the market.