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What is MARGIN

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MARGIN: The amount of credit a broker or lender extends to a customer for purchase of securities is known as margin. It was introduced by SEBI to restrain speculative dealings in shares leading to volatility in the prices of securities.

INITIAL MARGIN: The minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may take advance the balance amount to meet full settlement obligations. This amount is to be kept in the client accounts at the time of actual purchase. 

An Initial Margin Requirement refers to the percentage of equity required when an investor opens a position. 

Example: If an Investor has Rs.5,000 and would like to purchase equity shares of Reliance Industries Ltd. which has a 50% initial margin requirement, the amount of equity shares of Reliance Industries Ltd.

The Investor is eligible to buy on margin is calculated as follows:-
Buying power 50% is less than or equal to Rs.5,000/-

>> Buying power >> is less than or equal to Rs.5,000/50% = Rs.10,000/-

>> The investor can purchase equity shares of Reliance Industries Ltd. up to Rs.10,000 using the margin buying power.

MAINTENANCE MARGIN: Minimum amount, calculated as a percentage of market value of the securities calculated with respect to last trading day‟s closing price, to be maintained by client with the broker. If the balance deposit in the client‟s margin account falls below the required maintenance margin, the broker shall promptly make margin calls. The broker may liquidate the securities if the client fails to meet the margin calls made by the broker. 

Margin trading acts as a check on the tendency of clients to manipulate markets by placing orders on brokers without having adequate money or securities to backup the transaction. Margin trading also acts as a curb on short selling and short buying. 

Example: If you purchase Rs.16,000 worth of securities by borrowing Rs.8,000 from broking firm ad paying Rs.8,000 in cash or securities. If the market value of the securities drops to Rs.12,000 the equity in your account will fall to Rs.4,000 (Rs.12,000 – Rs.8,000 = Rs.4,000). If your broking firm has a minimum 25% maintenance requirement, you must have Rs.3,000 in equity in your account (25% of Rs.12,000 = Rs.3,000). In this case, you do have enough equity because Rs.4,000 in equity in your account is greater than the Rs.3,000 maintenance requirement.

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