Page 308 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 14: Capital Market and Financial Institutions

4. Dealer in non-cleared securities: He/she deals in securities which are not on the active list. Notes
5. Odd-lot Dealer: He/she specializes in buying and selling in amounts which are less than
present trading units. They buy and sell odd lots, make them up into marketable trading
units. These dealers receive commission. Their earnings come from the difference between
the process at which they buy and sell. The odd-lot dealer has become an important
operator since the growth of new issues. When the number of applicants for a new issue is
large, shares may be allotted in lots which are smaller than prescribed lots. The odd-lot
dealer makes profit on the large numbers of odd-lots by buying and selling at different
prices.

6. Budiwalas: He/she specializes in buying and selling simultaneously in different markets.
The difference between the buying price in another market constitutes his profit. However,
he can transact such business only if a security is traded on more than one stock exchange
and if exchanged telephonically or ax-linked. In India, arbitraging has become a growing
business. Arbitraging requires prior application to the governing body “in order to avoid
“ the evil of “joint account” with members of other stock exchanges and consequent
involvement of one exchange in the difficulties of another.
7. Security Dealer: This dealer specializes in trading in government securities. He/she mainly
acts as a jobber and takes the risks inherent in ready purchase and sale of securities. The
government securities are over the counter and not on the floor. They maintain daily
contacts with the Reserve Bank of India and common banks and other financial institutions.
As a result of their activities, government securities are quoted finely.

Task List the main key members of the stock exchanges along with their respective
functions.

14.3.2 Margin Trading

Margin trading occur when investors who purchase stocks on margin borrow part of the purchase
price of the stock from their brokers, and leave purchased stocks with the brokerage firm in
street name because the securities are used as collateral for the loan. The interest rate of the
margin credit charged by the broker is typically 1.5% above the rate charged by the bank
making the loan. The bank rate (called the call money rate) is normally about 1% below the
prime rate.
1. Percentage margin: The ratio of the net worth, or “equity value” of the account to the
market value of the securities.
2. Maintenance margin: The required proportion of your equity to the total value of the
stock. It protects the broker if the stock price declines.
3. Margin call: If the percentage margin falls below the maintenance margin, the broker
issues a margin call requiring the investor to add new cash or securities to the margin
account. If the investor fails to provide the required funds in time, the broker will sell the
collateral stock to pay off the loan.

Example: Suppose an investor initially pays 6,000 towards the purchase of 10,000
worth of stock ( 100 shares at 100 per share), borrowing the remaining from the broker. The
maintenance margin is set to be 30%. The initial percentage margin is 60%. If the price of the
stock falls to 57.14, the value of his stock will be 5,714. Since the loan is 4,000, the percentage
margin now is (5,714 – 4,000) / 5714 = 29.9%. The investor will get a margin call.

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