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Buying stocks on margin credit not viable: Study

Staff Correspondent
01 Oct 2022 00:00:00 | Update: 30 Sep 2022 22:33:12
Buying stocks on margin credit not viable: Study

Margin loan has a significantly negative impact on the capital market investment as it reduces the trading frequency as well as put investors to the tests during bear trading, said a Bangladesh Institute of Capital Market (BICM) study.

Speakers came up with this opinion during a seminar, while presenting the findings of the study styled “Effect of Margin Loan on Investment Behavior and Performance: Insights from Bangladesh’s Capital Market” in the capital Thursday. Assistant Professor Dr Tamanna Islam, while presenting the keynote of the study, said margin credits significantly impact the stock market behaviour, because after taking the margin credit, an investor’s trading frequency went down.

At the same time, the turnover and the portfolio size are also influenced by the margin credits, she stated.

A margin loan is a credit an investor availed of from his or her brokerages or merchant banks to pay for securities that he or she cannot cover with cash. A margin loan allows an investor to borrow against the value of securities he or she already owns.

Attending the event, Al-Amin, an associate professor at the University of Dhaka, however, noted that the literature review and research findings of the study were contradictory.

It would have been a good option if the study had included some more relevant practical issues. He also asked to re-study the findings by adding some more relevant issues to make them more credible.

Currently, a stock investor in Bangladesh can avail of Tk 100 as margin credit against an investment of Tk 100 each.

When stock prices remain bullish, then a margin loan does not appear as a burden, but when stocks are nosedive, then it appears as a burden for investors. Even, investors sometimes have to sell their holdings to repay the margin credits once availed from brokerages, speakers said.

It is very often said that during the 2010 market crash in Bangladesh, the margin borrowers suffered the most because they had to liquidate their holdings at much lower prices only for repayment of margin credits.

Established in 2008, the BICM aims to enhance professional excellence to build an efficient, transparent, competitive, and prosperous capital market in the country.