Trading stocks: short trades and margin trading

A very frequent question that arises among beginner traders: how the downgame in securities trading happens? Everything is more or less clear with the upside game, logically combined with a lot of situations in life, and considered simply: bought at a lower price, sold at a higher one, and finally made a profit on the difference in rates. Then with the game on decrease everything is not so simple.

You can use a simple principle: sell available stock at the same price and buy them at a lower price when the market goes down. In the end, the investor stays with his promotions and at the same time has a profit from the exchange rate difference. However, in this case the possibility of downgame is very limited compared to upgame. In the latter case the trader with some capital is not limited in the choice of shares for purchase. Based on his own considerations for the game on rise, he can choose any set of shares. In a downgame, the trader is limited only to the shares he has in his possession.

Почему позиции “Короткие”?

The game on the decline of stocks in stock exchange slang is called "short positions" or "short sales. And the game on rise - "long positions". Short selling positions are called because the share price is limited in its fall, from the current price to "zero", below zero the share price simply cannot be. The upper limit of the stock price is theoretically unlimited, from the current price to infinity, which is why such positions are called "long".

In order to level the playing field of the downgraders with the upgraders, the principle of the so-called margin trading (margin trading). It should also be noted that this principle applies mainly to speculative transactions on the stock exchange - that is, such transactions in which securities are bought or sold in the expectation of making a profit from the difference in exchange rates.

Principles of margin trading on the securities market

Margin trading is trading on the securities market using borrowed funds from a broker. And the borrowed funds broker can be in the form of money as well as in the form of securities. This type of trading has appeared in the stock markets since time immemorial; the modern features of margin lending were defined at the beginning of the last century in the United States. Today, the system of margin lending adopted in the U.S. markets, by legislation and organization, serves as an example for other world stock exchanges.

For the broker margin lending is one of the official sources of incomeIn addition to the commission charged by the broker from the client for performed operations. And the broker has the right to lend only to solvent clients, that is, only if the investor has his own funds. Credit means are given by the broker proportionally to the client's own means, on the basis of so-called leverage. That is, the broker grants a loan in excess of the available funds of the client, proportional to the amount of own funds multiplied by a certain coefficient, which is called the "leverage".

Maximum leverage broker depends on the state regulating laws on margin trading. However, even within the allowable margin, leverage is not fixed and depends on the client's current market positions and the calculation of the corresponding risks.

The broker proceeds from the fact that the client, when playing the game on the increase or decrease of the share price with the use of the broker's leverage (i.e. borrowed funds of the broker), can get a loss which will be equal not only to the amount of his own funds, but also to the part of the broker's borrowed funds.

Based on the existing risks, the broker calculates the margin level for each client. And the formulas can be quite complicated, because it is necessary to take into account many factors: the situation on the market, the balance of profitable and unprofitable positions of the client, liquidity of the client's portfolio and many other things. If the margin coverage by the client's own funds is insufficient and reaches a critical point, at which the broker begins to incur losses. the broker can independently close unprofitable positions or require additional funds from the client to secure the margin call.

It should also be noted that not all stocks on the stock markets are allowed for margin trading. Not every security can be bought on credit. Shares available for margin trading must meet appropriate liquidity norms, which are established by the exchange legislation. In addition, in all countries where margin trading takes place, there are legally established limits for margin leverage.

In the USA, Great Britain, Germany the margin on the stock market can be 20-50%%. In Russia a margin of 25-50%% of the contract amount (as of February 2007) is allowed for trading some shares.

In especially crisis situations Regulators may restrict the ability to engage in marginal transactions. For example, at the beginning of the global crisis in 2008, in order to avoid panic in the U.S. stock markets, the U.S. Securities and Exchange Commission restricted the short (ie, play on the decline) sale of securities of 19 major financial companies, then the list was expanded to 800 financial companies.