It is exactly what it sounds like: more money to fund your stock picks. The recent announcement by the market watchdog SEBI (Securities and Exchange Board of India) permitting 'margin trading' once again comes as a shot in your arm, if you've been hopping about frantically for fresh funds to wager on the bourses. So don't sell off that piece of land that's been lying around for years, and hang on to all the jewellery that's had you chin-rubbing ever since that New Year's party. There's other cash to go round.

Now, margin trading isn't exactly an activity Indian stock players have been unaccustomed to. It had been quite a roarer in the major Sensex jamboree of 1999-2000, as housewives and others turned 'day traders' to multiply their cash. Once things went awry, it was banned. Margin trading, with its extra ring of surplus cash, is now back. Tempted? Read on.

Margin And Tonic

Most Indian brokers, while welcoming margin trading back as a mode of retail funding (and awaiting detailed guidelines), see it as an obvious next step taken by SEBI after the changes wrought in operational practices to prevent any large-scale trading mishap. Computerised paperless trading has taken charge, settlement systems have been revised, and fraud supervision has been rehauled. It all adds up to a renewed sense of scam-free market confidence. ''Margin trading, and the stock lending guidelines announcement by SEBI, is a positive and reformist step,'' says Tarun Shah, CEO, Sharekhan, adding that, ''Any guideline from the regulatory authority is the only way to move towards correct and controllable processes-for all constituents to follow.''

How margin trading works is the following. For some minor sum by way of 'margin' that you give your stock broker, he proceeds to acquire stock worth more than that sum of money-in effect, loaning you the extra cash. The underlying assumption is that you're in speculative mode (buying, that is, with a view to selling in the immediately foreseeable future), and that the cushion-the margin-will be enough to cover any losses you may incur. The stocks, of course, are the broker's collateral.

For example, if you the retail investor want to buy 500 shares of ABC, now quoting at Rs 200 (in expectation of its touching, say, Rs 500 in two weeks), you would ordinarily need Rs 100,000 to make the purchase. But instead of having to fork out that fat sum, all you give your broker is Rs 50,000, and he puts in the other half to buy the shares for you. In earlier days, brokers were funding clients up to 80 per cent of their deals. But SEBI's guidelines have put a cap on how much can be done so (See The Safety Margin).

In the above case, if the stock moves up as anticipated, and is sold two weeks later through the 'margin account', the broker would credit the profit to your account after adjusting for the loan repayment (oh yes, there's no free lunch). The interest on such loans is high, no doubt, in comparison with most other loans (lower-risk loans, it must be said), but with stock prices so volatile, a sharp increase in price more than pays back the burden.

What happens if it's the other way round? It is, of course, a loss you must bear. You can sell when you want, and square your accounts with the broker. Simple arithmetic dictates that so long as the current notional loss (the difference between current asset value and acquisition cost) is less than the Rs 50,000 margin sum, the broker won't be panicky. But if the share tanks and threatens to wipe out even that sum, the broker would be tempted to sell without your consent.

The forces of temptation have now been standardised. According to Shah, brokers in the past have ''bent backwards to fund clients'' on their own accord and have suffered. But don't expect more of the same. By the new SEBI rulings, if the stock value drops below 40 per cent of the original deal, the margin amount will have to be topped up. So if ABC is at Rs 70, you pay an additional Rs 5,000 margin to stay invested. If it falls below 30 per cent (say, Rs 59), the broker has the right to pull your game's plug and sell your lot without asking you.

''The systemic risk in broker funding is immense,'' says Manish Shah, Head (Retail Broking), Motilal Oswal Securities, ''This cautious move by SEBI will go a long way in bringing about transparency in the system.'' Sharekhan's Shah concurs broadly, saying that the new system ''ensures better risk management and protects brokers from litigations by clients on squaring up their positions''. The other good news: interest charges can come down, too.

Funding Funnel

There was a time when brokers offering margin facilities to their clients (favoured clients, mostly) were using either their own money or that of other cash-swamped clients happy to play moneylenders. Now, under the new directive, brokers can borrow money from banks, non-banking finance companies and even insurance companies. However, there's a prudential limit: the broker can borrow only up to five times his net worth. And no using other individuals' funds anymore.

But are banks willing to take on such unprecedented risks?

Well, they're already stuffed with bonds (the yield story still has some observers rubbing their eyes). Some have even exhausted their limit of exposure to stocks. As Motilal Oswal's Shah says, ''The dynamic banks are either on the way to exhausting or have already exhausted the loan-against-shares cap of 5 per cent, as stipulated by RBI.'' But there are others that could still pump money into the bourses. ''There is no reason why monies from NBFCs (Non-Banking Finance Companies) and smaller banks won't flow into the stockmarkets, given the fact that 50 per cent margin is quite safe,'' continues Shah, ''Since the law is clear-cut and the rules stringent, there shouldn't be any problem.''

Thinking Options

It isn't, of course, mandatory to use your broker as a banker. Any commercial bank (if within its RBI limits) can theoretically lend you funds, but will do so only against pledged securities it can rely on. There are also the neighbourhood unorganised sector sahukaars, with their lingering shadowy presence since the 1920s, but their terms are often so horrendous that it seems their business idea is to profit on naïvete and greed. Avoid them.

Fiscal and moral sense lies in universally acceptable options. There are other ways to do leveraged deals as well. Through derivatives, for example, which are broadly defined as complex instruments made up of underlying assets (such as stocks) to suit special needs. You could use 'futures'-the rights to buy and sell stocks at fixed prices later on-to take large bets on stocks with not so much money. The derivatives market, says Sharekhan's Shah, is gaining depth at last. That's good.

But then, even more than margin trading, the use of derivatives requires a sharp understanding of the risks inherent in such activity. So go ahead and yield to temptation if you will, but do ensure you are well acquainted with the assorted probabilities-either way, upside or downside.