Kenya's capital markets authority mulls margin trading to lift bourse

Key Takeaways

In a standard margin trade, a trader engages in borrowing money from a brokerage firm, initially securing the loan by depositing funds as collateral. The trader is then obligated to make interest payments on the borrowed funds. This loan effectively amplifies the buying power of investors, enabling them to acquire a larger quantity of shares or securities. The securities purchased also function as additional collateral for the margin loan. In some markets, investors are permitted to borrow an amount equivalent to their cash deposit, effectively doubling their purchasing capacity in the stock market. To facilitate margin trading, traders typically open margin accounts, outlining the terms of the broker-lender arrangement. While margin trading provides an avenue for investors to increase their share purchases, it also exposes them to the risk of potential losses exceeding their deposited funds. In such cases, investors may be required to inject additional funds or face a forced sale of securities if their portfolio value drops below a predetermined minimum.