What is Margin in Stock Market? Types and How to Use Margin
Margin is the minimum amount of money or collateral you must have in your trading account to take a position in the market. In delivery trading, you need the full value of the shares. In F&O and intraday trading, you need only a fraction of the total position value, which is the margin. The broker or exchange provides the rest.
Think of margin like a down payment on a house. You do not pay the full price upfront. You put down 20% and the bank funds the rest. In F&O trading, the exchange requires you to deposit margin as a security deposit against your position. If the trade moves against you, the margin covers the loss.
What are the types of margin in Indian markets?
| Margin Type | Where It Applies | What It Covers |
|---|---|---|
| SPAN Margin | F&O | Minimum margin for worst-case one-day loss |
| Exposure Margin | F&O | Additional buffer over SPAN for extreme moves |
| VAR Margin | Cash market | Volatility-based margin for equity delivery |
| ELM | Cash market | Extreme loss margin for tail-risk protection |
| MTM Margin | F&O | Daily mark-to-market settlement of P&L |
| Initial Margin | All segments | Total upfront margin (SPAN + Exposure for F&O) |
How is margin calculated?
For F&O, the total initial margin is SPAN margin plus exposure margin. SPAN is calculated using a complex model that considers volatility, price changes, and correlation. Exposure margin is a fixed additional percentage. Together, they typically range from 15% to 50% of the contract value depending on the stock's volatility.
For equity delivery, SEBI requires upfront collection of VaR and ELM margins. However, since you are paying the full price for delivery shares, margin is effectively 100% of the trade value, collected in the form of funds in your account.
What happens if your margin is insufficient?
If your available margin falls below the required level due to losses on your positions, the broker issues a margin call asking you to add funds. If you do not add funds, the broker can square off your positions to limit the loss. This forced closure can happen at unfavourable prices.
Monitor your margin utilisation at stockk.trade/products/fno.
F&O trading involves substantial risk. Losses can exceed your deposited margin. This article is for educational purposes only.
Frequently Asked Questions
Can I use pledged shares as margin instead of cash?
Yes. You can pledge shares in your demat account and receive margin credit after a haircut. The haircut varies by stock. This allows you to trade F&O without deploying full cash. However, if your F&O position incurs losses, the broker can sell your pledged shares to recover the loss.
Is margin the same as leverage?
Related but not identical. Margin is the amount you deposit. Leverage is the multiplier of exposure you get. If you deposit Rs.1 lakh as margin and take a Rs.5 lakh position, your margin is Rs.1 lakh and your leverage is 5x. Higher leverage means higher potential profit and higher potential loss.
Do I get interest on margin money kept with the broker?
Generally, no. Margin money in your trading account does not earn interest like a savings account. Some brokers offer the option to keep funds in liquid funds or fixed deposits that can be used as margin while earning returns, but this varies by broker.
What is peak margin and why did SEBI introduce it?
Peak margin requires brokers to check margin adequacy not just at the end of the day but throughout the trading session. SEBI introduced this in 2021 to prevent excessive intraday leverage. Brokers must collect margins based on the highest position held during the day, not just the closing position.
Can margin requirements change during the day?
Yes. The exchange can increase margin requirements for specific stocks or contracts if volatility increases sharply. This is called an ad hoc margin increase and is done to protect market stability. Traders can receive margin shortfall notices during the day if the required margin increases.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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