মার্জিন ঋণ Margin loan

A margin loan is borrowing from your broker to buy shares. You have a lakh, the broker lends another lakh, and you buy two lakh worth.

The pitch is seductive: if the share rises 20% you make 20% on two lakh, which is 40,000, which is 40% on your own lakh. The loan doubled your gain.

This lesson carries five stars because of the other half of that sentence, which the seller does not say: the loan doubles your loss too, and worse, the loan takes away your ability to wait.

See the numbers yourself

Raise the fall. The important number is the third one: what percentage fall takes your own money to zero. At one times leverage it is 50%, at two times 33%, and a 33% fall is nothing unusual in this market.

The margin call: the worst part

This is the real danger, and it is worse than the interest.

The broker holds your shares as collateral and requires a certain ratio to be maintained. When a falling price breaks that ratio, the broker tells you to deposit more money or sell some shares. That is a margin call. If you do not respond, the broker sells for you, and the right to do so is written into the agreement you signed.

Now notice the timing. A margin call arrives precisely when prices are lowest, which is the worst possible moment to sell. And because many investors are on margin at the same time, their forced selling pushes prices lower still, which triggers more calls. That loop is what turns an ordinary fall into a crash.

What happened in 2010

This mechanism sat at the centre of the biggest crash in this market's history. In 2009 and 2010 margin was easy to get and many brokerages sold it aggressively. Hundreds of thousands of new investors borrowed to buy shares, often knowing nothing about the companies beyond their names.

When prices began falling in December 2010 a wave of margin calls started. Forced selling drove prices lower, which triggered more calls. The index roughly halved within a year. People without debt could wait and were back within a few years; people with debt had everything sold at the worst possible prices, and many still owed money afterwards.

Do not forget the interest

Margin carries interest, usually higher than a bank loan. So it is not enough for the share to rise; it has to rise by more than the interest rate, or you have done worse than you would have unleveraged.

In a flat market, which is common, you are paying interest and receiving nothing. Margin does not only hurt in a bad year, it hurts in an uneventful one.

Check yourself