Capital Markets Authority Proposes Margin Trading Regulations to Boost Nairobi Securities Exchange Activity

In a bid to rejuvenate share trading on the Nairobi Securities Exchange (NSE), the Capital Markets Authority (CMA) is actively developing regulations for margin trading. Margin trading involves investing in shares using funds borrowed from a lender, typically a stock brokerage or investment bank.
Despite the NSE experiencing a prolonged period of low volatility and low stock valuations, the CMA sees an opportunity for investors to purchase stocks at discounted prices, including through margin trading. The authority believes that engaging in day trading and margin trading in this low-volatility market will stimulate overall market activity and enhance liquidity.
“The low volatility in the market provides opportunities for investors to engage in day trading and margin trading, which in turn, will boost overall market activity and enhance liquidity. CMA is in the process of developing margin trading regulations,” stated the CMA.
Day trading involves buying and selling stocks on the same day to capitalize on small price movements. In a typical margin trade, a trader borrows money from a brokerage firm by depositing funds as collateral for the loan. The trader is then required to make interest payments on the borrowed funds.
Margin trading increases investors’ buying power, enabling them to purchase a larger quantity of shares with the securities serving as additional collateral for the loan. Some markets even allow investors to borrow the equivalent of their cash deposit, effectively doubling their buying power.
However, margin trading comes with risks. Investors may lose more money than deposited into the margin account, necessitating additional funds or a forced sale of securities if the portfolio falls below a minimum set value.
Margin trading is expected to complement day trading on the NSE, which commenced in December 2021 and allows investors to buy and sell securities within the same trading day.
By Delino Gayweh
Serrari Financial Analyst
January 29, 2023