What is VAR Margin in Indian Stock Market? How It Works
VAR margin, or Value at Risk margin, is the margin collected for equity delivery trades in the cash market segment. It estimates the maximum loss a stock can experience in a single day at a given confidence level, typically 99%. SEBI mandates the upfront collection of VAR margin for all equity trades.
If a stock's VAR is 12%, it means that based on historical price data, there is a 99% probability that the stock will not lose more than 12% in a single day. That 12% is collected as the VAR margin when you buy or sell the stock.
How is VAR margin calculated?
VAR is calculated using historical volatility data, typically over the past one year. Stocks with higher historical volatility have higher VAR margins. The exchange computes VAR for every listed stock and updates it regularly.
| Stock Category | Typical VAR Range |
|---|---|
| Group 1 (large, liquid) | Lowest VAR, based on actual volatility |
| Group 2 (moderately liquid) | Higher than Group 1 |
| Group 3 (illiquid, small) | Highest VAR, minimum prescribed rates apply |
How does VAR affect you as an equity investor?
When you buy shares for delivery, the broker collects VAR margin plus ELM margin upfront. For most practical purposes, you need the full trade value in your account to buy delivery shares. VAR and ELM together ensure that the broker has adequate funds collected to cover potential losses before settlement completes on T+1.
Investments in securities market are subject to market risks. This article is for educational purposes only.
Frequently Asked Questions
Is VAR margin the same as F&O margin?
No. VAR margin applies to cash market equity trades. F&O uses SPAN and exposure margins, which are calculated differently. The concepts are related since both estimate risk, but the models and application are distinct. VAR is simpler. SPAN uses a more sophisticated scenario-based approach.
Does VAR margin mean I cannot buy shares with the full amount in my account?
For practical purposes, if you have the full trade value in your account, VAR and ELM margins are covered automatically. The margin requirement becomes relevant when you are trying to use leverage or trade with insufficient funds. For regular delivery buying with full funds, you will not face margin issues.
Can VAR margin change for the same stock?
Yes. VAR is recalculated periodically based on the stock's recent volatility. If a stock becomes more volatile, its VAR margin increases. If it becomes less volatile, VAR decreases. Changes are applied by the exchange and reflected in the margin requirements on your broker's platform.
What is the difference between VAR and SPAN?
VAR is a statistical measure used for cash market margins, based on historical volatility at a 99% confidence level. SPAN is a scenario-based risk analysis model used for F&O margins that considers multiple price and volatility scenarios. SPAN is more comprehensive and is specifically designed for derivatives portfolio risk.
Where can I check the VAR margin for a specific stock?
NSE and BSE publish VAR margins for all listed stocks on their websites. Your broker's margin calculator also shows the applicable VAR and ELM when you select a stock for buying. The information is updated regularly as volatility changes.
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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