Margin Calculations

Welcome back. Hope you had great time during Diwali.

Well, I am back with more on Margins. Have already put one on Options Blog regarding Margin for Options. Hope you will like it. Coming back here, we have seen how margin call can be very confusing for newbee traders and they may feel that their broker is somehow taking them for a ride. An apparently modest move can create substantial margin shortfall and broker has all the rights to square-off positions if you do not fulfill margin requirements. Unfortunately such square-off almost always happens when the markets are at their worst positions and thus adding to the mayhem.

But what do we do? Simple, do not trade on margins. Trade at the actual face value of the trade or reduce the leverage. Let us revisit trade in our last post; You take position worth 250000 for a margin of 25000 which means a leverage of 10. It is ok if you have another sum ready to fill in any margin void.. But what if you have only 25000 and cannot furnish further margin... It's simple, do not trade in Futures. Really, I am not joking.

Usually I will not advice anyone trading in Futures if you do not have 200000 to trade and that too risk money (which you can afford to loose) and not in any case if you do not have 100000 at least. With such money also, keep in mind that you need to start with a trade needing initial margin which is 25% of your risk money and not more.

Now, you must have already lost appetite for further reading. Who has that kind of money... particularly risk money. well, don't loose heart.

It's not always hard cash that you need to provide as margin. You can provide securities, fixed deposits, Government Bonds, etc. Each broker will have their own rules of what is acceptable as collateral for margin and what is not. Obviously, stocks are not taken as collateral for full value and a percent of their market value is acceptable as margin.

Also if you have multiple trades then your margin calculation can vary as it is calculated for an entire portfolio... so a simultaneous buy/sell (hedged) positions may have lesser margin requirement than a single position. But then, there may be some variation in this depending on the broker you are using.

Recently SEBI has been very active on margin requirement and it's fulfillment. They have sent a circular (read here) to all brokers regarding strict adherence to it and heavily penalized few of them for not meeting it. This in turn has made brokers very strict about collecting margins (earlier they were lax in doing so for the big players). Life for you and I... remains same.

Will cover anything remaining and worth knowing about margins in the next post.