You might have come across the word “Margin” in stock markets. That’s what this post talks about: Margin requirements in Indian stock market. Know the meaning and different types of margins available in stock market in India.
“Margin” which in general English merely means a cushion gap in between two objects. Similarly, in the stock market it has its own meaning and details. You can browse through the article for understanding further details.
What is Margin? Meaning
In business, it is generally known as the difference between a commodities’ selling price and its cost of production, however, within the stock market, the margin is defined as the least amount required from a client by the broker, prior to a trade being performed. It’s enforced by the exchanges as part of their comprehensive risk control system and brokers are mandated to follow them.
The Securities and Exchange Board of India allows margin trading with cash and shares, which are provided as collateral. Furthermore, SEBI authorizes brokerage firms who can offer these accounts and has strict reporting protocols associated with it. They can also change margin collection rules on a regular basis to augment safety for all the parties involved.
SEBI keeps updating the rules of margin collection and its reporting requirements, thereby protecting the rights of investors.
Why is Margin required?
- To keep clients accountable while supporting the market to lessen the risk involved in case of failure of delivery of stocks sold or payment for the stocks brought.
- It can boost the buying capacity of a user to make a bigger bet and attain a better return on the stock investment.
What are Types of Margins in Stock Market?
BSE and NSE specifies a range of margin for different segments which can be categorized as follows:
1. Mark to Market (MTM):
This is quite simple to grasp! Let’s say that a user acquired 100 shares of XYZ company at Rs. 200, but at the completion of the day the closing price reached Rs. 190, then we can state that the trader is facing an estimated MTM loss of Rs. 1000 (Rs.10 loss for 100 shares) which is payable by the next market day. MTM is basically calculated by comparison of the transaction price with the closing price at the end of the day.
2. Extreme Loss Margin (ELM):
ELM is meant to contain shortfalls in scenarios where the losses go beyond 99% risk estimates. It’s tweaked against the aggregate liquid assets of the member immediately. The exchange lists the ELM amount applicable to their website.
3. Value at Risk (VaR):
It is expected to cover the worst loss which could have the tendency of wiping out 99% of the portfolio value. As per the protocol, it is listed on the exchange website daily.
4. Initial Margin or SPAN Margin:
Standard Portfolio Analysis of Risk (SPAN), also known as initial margin, this is meant for the F&O segment. It is the mandated initial obligation that needs to be paid by traders before initiating a deal in this segment. This is primarily meant to cover 99% value at risk over a day’s horizon. Most of the brokers carry a SPAN calculator on their website.
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5. Exposure Margin:
Exposure margin is meant for F & O contracts and acts as a second protective shield to the derivative trading risks. Hence, this is the total sum required which acts as a cushion or another line of protection above the SPAN margin.
Additionally, following margins are also available for option contracts:
6. Premium Margin:
The amount payable on the option contracts purchased multiplied by its premium value. The buyers of Options contracts have to pay the Premium margin.
7. Assignment Margin:
In addition to SPAN and Premium margin, the assignment margin is imposed on a clearing member with respect to interim and final payment commitments for option contract till the payment towards exercise agreement is done. To simplify, Assignment premium is paid by sellers of option contracts.
Here’s a glimpse of margin requirements for Cash Market, Equity Intraday, Derivatives (F&O):
|Margins for Cash Market||Margins for Intraday|
|Margins for F&O|
|Mark to Market (MTM) Margin||Value at Risk (VaR) Margin||Initial Margin|
|Value at Risk (VaR) Margin||Extreme Loss Margin (ELM)||Exposure Margin|
|Extreme Loss Margin (ELM)||Premium Margin|
For Equity Delivery:
For purchase of delivery trades, it’s the amount specified by the market which is required to be kept handy. It includes the minimum Value at Risk (VaR) in addition to the Extreme Loss Margin (ELM). It might not matter to few brokers who anyways ask for the complete purchase value to be fulfilled in advance.
On the sell side, in situations where the broker has the power of attorney (PoA) on the demat account there might not be a necessity of margin. But, if the broker doesn’t have PoA, the customer is required to pay the margin. So, if the customers fails to deliver, adequate margin is there to work towards a settlement loss to the buyer, thereby reducing the overall risk.
For Equity Intraday:
For intraday, the client is again required to keep the VaR plus ELM as specified by the stock exchanges. Basically, a trader has to pay a minimum amount for intraday trading. In case the user uses the leverage offered by the broker, once the minimum sum is met, then the broker must use its own funds to offer the leverage rather than tapping into the clients remaining funds for this intention.
Also, know the difference between Intraday Trading vs. Delivery Trading
For Equity Derivatives (F&O):
The brokerage firm uploads details of the amounts available in the customers trading account based on mandate by the market at day close. It is primarily pertaining to the required sum in relation to the positions taken by their customers. It’s the combination of the SPAN and Exposure margins. Penalties are levied by the in case the available amount is less than what is required.
In conclusion, even though as traders we might feel these requirements are avoidable. However in a broader sense, we are able to understand that its part of the efforts to provide for a safe and validated system, even amid fluctuations.
Moreover, you can find a number of online Margin Calculators to calculate margin for different segments. Feel free to share your feedback and queries on this stock market concept and any details on the same.