Stock Market is also susceptible to uncertainties just like weather, health, traffic, etc. The uncertainty in the stock market is the erratic movement of share prices. This uncertainty puts all the stakeholders of the market at risk. Thus, Margins are used in the stock market to sustain the risks that arise due to uncertainty.
What is margin?
Suppose you are trading intraday and want to purchase 1000 shares of ‘XYZ’ company at ₹100/- on a trading day, say ‘T’ day. You need to pay ₹1,00,000/- (1000 x 100) to your broker who in turn pays the amount to the respective stock exchange you are buying shares from. What if you don’t have the total amount of ₹1,00,000/- to buy the shares at that moment?
You can pay a portion of the total amount of ₹1,00,000/- as advance to the broker at the time of placing the buy order. Stock exchange in turn collects a similar amount from the broker upon execution of the order. This initial token payment is called Margin.
In the above example, assume that the margin is 15%. You have to pay ₹15,000/-(15% of ₹1,00,000/) upfront to place your order.
The margin required differs from share to share depending upon the volatility, segment to segment depending upon the settlement/time of expiry. In this article, we will let you know how margins are calculated for the equity and derivatives segment.
Margin calculation for Equity Segment
Daily Margin for an equity share comprises the sum of Value at Risk (VaR) Margin and Extreme Loss Margin(ELM).
- VaR estimates the risk of loss in investments. It calculates the percentage of an investment you might lose in a set period given the normal market conditions.
- ELM aims at covering the losses that could occur due to the possibility of erratic market movements beyond regular risk estimates.
Click here to learn about the above margins.
Calculation of VaR
To arrive at VaR margin rate, all the securities are divided into 3 categories based on how regularly their shares trade and liquidity
|Category||Number of days traded in the previous 6 months||Impact Cost
(measure of liquidity)
|Group-1||>80% of trading days||<1%|
|Group-2||>80% of trading days||>1%|
|Group-3||All the other shares that are not under Group-1 and Group-2|
Exchanges calculate VaR margin and ELM for the above categories and circulate the same to the registered brokers And the brokers charge the same to you.
As per the exchange rules,
If (VaR Margin+ ELM)= X%, the margin requirement is at X% or 20%, whichever is higher.
For instance, if (VaR+ELM)=17%, Angel One considers the margin requirement as 20%.
For instance, if (VaR+ELM)=28%, Angel One considers the margin requirement as 28%.
The applicable margin will be collected upfront while you place your buy/sell order.
Note that Angel One doesn’t charge margin for selling of securities if you are selling from your Angel One’s demat account. Also, Angel One gives you the credit for sale up to 80% of the sale on the ‘T’ day itself.
Margin Calculation for Derivatives(F&O) segment
For the F&O segment, the total margin collected comprises the sum of SPAN margin and Exposure Margin
- SPAN is short for Standardized Portfolio Analysis of Risk. SPAN Margin calculator helps you to determine the Margin required by simulating 16 distinct scenarios. SPAN margins are revised six times a day, so the calculator will give different results depending on the value of the underlying asset.
- Exposure margin is an ad-hoc amount over and above SPAN, collected as protection against investor’s liability that may arise from erratic market swings.
Click here to know more about SPAN and Exposure Margins.
A margin calculator is available to calculate the margin for each F&O scrip. Click here to access the F&O margin calculator on Angel One.
A F&O margin calculator looks as follows
You need not worry about the math involved in calculating the SPAN and Exposure Margins. The calculator does it for you. All you have to do is enter the required inputs for your trade and get the results as illustrated below
If you are a F&O trader, the margin calculator comes in handy to analyse your trade before you place an order. Also, the margin calculator can be used to arrive at the margin while placing multiple counter positions and verify if you have any margin benefit if you place such positions.
One of the margins you must be aware of when you are trading is the MTM margin.
MTM margin, short for Mark to Market Margin is calculated at the end of the day on all open positions by comparing the transaction price with the stock’s closing price for the day.
For instance, if you buy 100 shares of ‘X’ at ₹100 at 11 AM on a trading day ‘T’ and if the closing price of the shares on that day happens to be ₹75, then you will face a notional loss of ₹2500 on your buy position. This loss is termed as MTM loss and is payable on ‘T+1’ day before the opening of the market.
However, if the MTM loss on “Intraday” positions reaches 80% (the trigger) of the total funds available, then Angel One closes all the open positions across all segments on the best effort basis. The Risk Management System of Angel One (RMS) will constantly monitor the “Intraday” positions for the Clients and close them out accordingly. Before that, Angel One informs you to add the required margin as you approach the trigger(80%).
Margin will always be collected upfront as per regulatory guidelines. Margin collected will act as a cover against the potential risk of adverse price movement.
So investors now you know why certain scrips require high margin and others less. Now that you know how margins are calculated for different categories of scrips and how to use a F&O margin calculator make the most of it to make informed investment decisions. Happy Trading!
Disclaimer: Margin Funding is subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions are mentioned in the rights and obligations statement issued by Angel One Ltd.