Traders Angry at SEBI?

SEBI's move to protect investors backfires. Here's why.

Several traders wanted to observe "No Trade Day" on 1st September 2021 as a symbolic protest against the latest set of circulars introduced by the market watchdog, SEBI. 1st September was the date when the regulations came into effect.

So, why have these triggered this rage among the traders? 

Let's find out.

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Markets are at an all-time high and participation of retail investors has risen to an unprecedented level. Their exposure in NSE-listed stocks was at an all-time high of 7.18% in June 2021. A record 7.2 million demat accounts were opened in the June quarter! 

As a result, SEBI is afraid that the risk appetite of the investors would have increased manifold. If the market falls, these investors will lose tremendously. Now, in a bid to protect their interests, SEBI has been introducing new rules. 

But, why are the traders not happy?

You see, in the stock market, a person can lose much more money than what they already have. You can even sell shares that you don’t have, only to buy later. 

Say you feel that a stock that is currently trading at Rs.100 will fall to Rs.80 tomorrow. You feel it’s a great opportunity to make money, so you ‘sell’ 5000 shares today by borrowing these shares from your friend, Ekta. You get Rs. 5,00,000 today. (This is called ‘short selling’).

Now, when shares will fall to Rs. 80 tomorrow, all you will have to do is shell out only Rs. 4,00,000 to purchase those shares again and return to Ekta. You'll make a cool Rs. 1,00,000 without having any penny in your pocket!

Alas. Next day the stock price soars to Rs. 130! Now you have to pay Rs. 6,50,000 to buy the shares! A big hit of Rs. 1,50,000. 

Uh-oh. You had no money. How will you pay anything at all? Isn't this a big risk for Ekta? 

Stock brokers are the ones who execute all these different deals with you. You can only imagine the quantum of risk that they are bearing.

While this was a very simplified explanation, you get the point right?

A long time ago, SEBI saw this as a big, big risk and had implemented something called ‘margin’ requirements.

If you are willing to take up risk, you should be able to show that you have the appetite to pay up in case of a loss. How?

By depositing a portion of the money with the stock broker. This is called margin. 

How much should this margin be? SEBI decides that. 

Earlier, this margin requirement was lower. Which meant inclusivity. Traders with less money could try their hands on big trades. Sky was the limit. But in this process, they would expose themselves to very high risks.

So with the new regulations, these margin requirements have been increased: by a lot. 

For traders, this move is nothing short of clipping their wings from achieving their dreams of becoming rich in a jiffy. Naturally, they are not happy.

Is SEBI being too harsh in implementing the law? 

Let us know your thoughts!🥺

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