Capital constraints limit an investor’s ability to act on strong opportunities, even when market conditions align favorably. This is a common issue in the share market where opportunity and capital rarely align. Knowing what is OPM in the share market enables traders and investors to effectively understand the usage of Other People’s Money (OPM), borrowed funds through margin accounts, loans, or investor partnerships, to take larger positions than their personal savings allow. Let’s discuss the in-depth details in this blog.
Understanding OPM (Other People’s Money) in Trading
OPM in trading works simply means you use borrowed funds to control market positions larger than your own capital permits. This is what traders call leverage in trading, where your broker or a lender gives you extra funds to make bigger trades.
Say for example, is what traders call leverage in trading, where your broker or a lender gives you extra funds to make bigger trades.
How OPM Is Used in Stock Market Investments
In India, investors access OPM through SEBI-regulated channels, with margin trading being the primary structured method under the framework established by SEBI circular CIR/MRD/DP/54/2017. The process works as follows:
- Open a margin trading facility account: Only corporate brokers with a minimum net worth of Rs. 3 crore who have received Exchange approval can offer this facility, and you must open a separate MTF account with such a SEBI-registered broker.
- Provide initial margin: As per SEBI regulations, you deposit initial margin ranging from 27.5% to 37.5% of the trade value depending on whether the stock is in the F&O segment, payable in cash, cash equivalents, or pledged Group I equity shares with appropriate haircuts.
- Receive funded stock: Based on your margin deposit, the broker extends credit allowing you to purchase eligible Group I securities, with the funded amount not exceeding the broker’s regulatory exposure limits of borrowed funds plus 50% of their net worth.
- Securities held by pledge: All funded stocks must be held by the broker through pledge in a separate demat account tagged as ‘Client Securities under Margin Funding Account’ as mandated by SEBI circular SEBI/HO/MIRSD/DOP/CIR/P/2020/28 dated February 25, 2020.
- Maintain required margins: You must maintain the prescribed maintenance margin at all times on the lower of cost or market value of funded stock, and meet margin calls within the stipulated timeframe (not exceeding 5 working days) when values drop.
- Pay interest charges: Interest accrues daily on the borrowed amount as per the broker’s terms, regardless of whether your positions are profitable or not.
- Settlement and exit: Mandatory settlement of excess cash collateral occurs monthly or quarterly based on your preference on the running account settlement date notified by the exchange, and the broker must unpledge securities within one working day of receiving your payment.
Advantages and Risks of Using OPM
When you use OPM for stock investments, you’re amplifying your market position beyond what your personal funds would allow. This approach offers real benefits but also carries serious downsides you need to understand before proceeding. The advantages of using OPM include:
- Better returns on capital: If the invested stocks perform well, the gains multiply because you’re controlling a larger position with just a fraction of your own money. For example, if you buy ₹2 lakh worth of shares by putting down ₹50,000 and the stock rises 10%, you earn ₹20,000 profit, that’s a 40% return on what you actually invested.
- Increased market participation without draining funds: OPM lets you pursue multiple opportunities simultaneously without liquidating existing holdings or depleting your cash reserves.
- Faster capital deployment: Access to borrowed funds happens immediately within your trading account, letting you act on opportunities right away.
However, the leverage risks tied to OPM require careful consideration:
- Higher risk beyond investment: A 20% decline wipes out your entire deposit, and further drops leave you owing money beyond what you originally invested.
- Daily interest eroding returns: Interest accumulates daily, cutting into gains and deepening losses. This interest often isn’t fully tax-deductible either.
- Forced liquidation and penalties: When your position drops below required thresholds, automatic liquidation occurs at unfavorable prices. SEBI’s peak margin rules also impose penalties if your margin falls short even briefly.
- Loss of tax advantages: Margin positions typically close within 90 days to one year, preventing you from qualifying for lower long-term capital gains tax rates.
- Fluctuating margin requirements: Margin needs change based on volatility. A stock requiring 25% margin today could suddenly demand 40-50% if market conditions shift.
Key Strategies Using OPM for Stock Market Gains
Successfully deploying OPM through margin accounts requires strategies that balance opportunity with protection. The most helpful tips to follow for using borrowed funds are:
- Start small and scale gradually: Begin with small borrowed amounts to understand the effects of leverage. As you gain experience, gradually increase your use of margin accounts while closely monitoring results.
- Maintain conservative leverage ratios: Never max out available borrowing. Keep debt well below lender limits to create a buffer against margin calls during normal market swings.
- Focus on quality holdings: Put borrowed funds into established companies with strong fundamentals rather than speculative stocks, which become far riskier when purchased with debt.
- Use stop-loss: Set automatic sell points to limit losses without emotion getting involved.
- Use dividends to pay interest: Choose dividend-paying stocks and direct those payments toward covering interest charges, making the system partially self-sustaining.
- Keep cash reserves: Maintain separate emergency funds so market downturns don’t force you to sell at the worst times.
OPM and Its Role in Derivatives and Futures
OPM works differently in derivatives trading, where leverage is already built into how these contracts function. The key aspects of using borrowed capital in derivatives are:
- Increased leverage through futures: Futures let you control massive positions by depositing just 10% to 20% as margin.
- Options for controlled risk: Options contracts give you market exposure for just the premium cost. You can control positions worth lakhs by paying thousands, with your maximum loss limited to that premium.
- Daily mark-to-market settlement: Futures settle daily based on price movements. Profits or losses hit your account each day, requiring constant margin maintenance or facing automatic position closure.
- SEBI’s marin system: The SPAN + Exposure system calculates real-time risk-based margins with strict monitoring. Peak margin rules penalise even brief shortfalls, making compliance essential.
How OPM Affects Stock Price Volatility
OPM affects stock price volatility through several ways that can both calm and shake up markets. The core ones are:
- Increased trading volumes and liquidity: Margin participation pushes trading volumes higher, improving market liquidity and making it easier to buy and sell positions during normal conditions without dramatically shifting prices.
- Forced selling during market declines: When prices drop, margin calls force investors to dump their positions whether they want to or not. This creates a domino effect where falling prices trigger more margin calls, leading to more panic selling that drives prices down even faster.
- Amplification of market trends: During rallies, margin buying adds gasoline to the fire as investors pile in with borrowed money chasing momentum. When markets turn south, unwinding these leveraged positions accelerates the slide, making price swings far more violent in both directions.
- VaR-based margin adjustments: SEBI’s system cranks up margin requirements when volatility spikes, forcing traders to cut back on leverage. While this is meant to cool things down, these higher requirements often trigger forced selling that actually makes short-term volatility worse.
Conclusion
Understanding what is OPM in the share market opens doors to bigger opportunities, but it’s not free money. Borrowed capital amplifies both wins and losses equally. It works for disciplined investors who can handle pressure, maintain stop-losses, and have backup funds ready. Use it strategically on quality stocks with conservative leverage. Done right, it’s a useful tool. Done carelessly, it becomes a costly trap.
FAQ‘s
OPM stands for other people’s money using borrowed funds through margin accounts or loans to take larger stock positions than your personal savings allow, essentially leveraging your market exposure.
Through SEBI-regulated margin trading facilities, you open an MTF account, deposit 27.5-37.5% initial margin, receive funded stock, and pay daily interest while maintaining prescribed margin requirements throughout.
OPM amplifies returns, a 10% stock gain can yield 40-50% returns on your capital. It increases buying power and lets you pursue multiple opportunities without depleting cash reserves.
Losses amplify equally, a 20% decline wipes out your deposit. Daily interest erodes returns, margin calls force liquidations, and SEBI penalties apply for margin shortfalls with fluctuating requirements.
OPM increases liquidity but triggers forced selling during declines, creating panic. Margin buying fuels rallies while unwinding leveraged positions accelerates downturns, making price swings more violent.
Yes, futures need only 10-20% margin and options require just premium payment. However, daily mark-to-market settlement demands constant margin maintenance under SEBI’s strict monitoring system.
