Margin buying debuts on Bucharest Stock Exchange today

The first purchases of shares with money borrowed from brokers will begin on the Bucharest Stock Exchange today. BT Securities is the first brokerage firm to offer this option to its clients.
Other brokerage firms are preparing similar products, according to information available on the market, so that the ability to buy shares from the Stock Exchange with money borrowed from a broker might spread throughout the entire market in the next few months, and could give a boost to the quotes of listed shares as a result, particularly considering that the reverse operation, that is to sell borrowed shares, is not yet permitted.
“We are giving our clients the option of having their share acquisitions 100% funded by us in case security is provided,” says Rares Nilas, BT Securities’ general manager. He says the company has been testing these operations on the market in recent weeks.
According to the general manager of the Bucharest Stock Exchange, Stere Farmache, no company has engaged in margin trading until now, though the legal framework has been in place since last year.
Purchases made with borrowed money may increase the risk on the Stock Exchange, given that a 1% fluctuation of the price of a specific share ends up amplified by a several times higher percentage in the portfolios of the investors who trade in this manner, with the added risk of losing everything they have invested if the market experiences a significant decline.
Margin buying (where the investor comes up with only a part of the money necessary for buying shares, with the rest borrowed from the broker) is regularly witnessed on developed capital markets. Such transactions allow investors to multiply their profits, relative to the amount they have available, but the operation also entails a greater risk, as losses are much higher than when shares are bought exclusively with the investor’s own money.
Many investors, even until now, would resort to credits, but they also borrowed from banks to invest in shares to multiply their profits. A credit from a broker is granted more easily and investors do not have to prove they have the necessary revenues to repay the loan, as is the case with banks. The loan granted by brokers for buying shares is not subject to the National Bank of Romania (NBR) regulations, the BT Securities top man adds.
Margin trading is chiefly used by speculators, which could give a boost to the liquidity on the Bucharest Stock Exchange. The average traded value on the market since the beginning of the year has reached around 17 million euros, lower than in other neighbouring countries. In Poland for instance, the average daily traded value amounts to around 100 million euros.
According to current legislation, brokers may finance up to 50% of the shares purchased by an investor without the requirement of any security other than the stake bought by the investor.
However, if the customers pledge other shares from their portfolio as security, the new acquisitions may be financed in full, says BT Securities’ general manager. “There are many stock portfolios that investors keep immobilised and can be used for profit through margin buying,” he says.