If you are about to open a demat account and start trading in the stock market, you ought to know about the different types of margins charged by the stock exchange. But, before we explain that, what is the margin?
The amount of money or security that you have to pay to your broker before executing a trade through him is called margin. It is a percentage of the total transaction value. When you pay a margin before executing a trade, it shows your commitment to the trade. Let us talk about different kinds of margins.
Different Types Of Margin Charged By The Stock Exchange
There are three types of margin in the cash market segment of the stock exchange: Value at Risk (VaR) Margin, Extreme Loss Margin, and Mark to Market Margin.
Types Of Margin In The Cash Market Segment Of The Stock Exchange
1. Value at Risk (VaR) Margin
VaR means how much money an investor can lose over a certain duration, like a day, at a specific confidence level. Brokers estimate VaR margin to decide how much margin an investor has to maintain with them for his positions. In case, VaR indicates a high probability of loss, your broker may require you to pay more margin to cover for that risk.
2. Extreme Loss Margin
The stock market can fluctuate excessively and make an investor incur losses not covered by VaR margin. What should be done in that case?
This is why the stock market has a provision for “Extreme Loss Margin.” Extreme loss margin is meant to protect traders, brokers, and all the other parties involved from the possibility of extreme movements in the market, which are well beyond normal market fluctuations. In other words, it is meant for worst-case scenarios.
3. Mark-to-Market Margin
This kind of margin requires adjusting a trader’s margin on the basis of the current market value of his securities. Brokers assess the value of securities of all the traders every day. Based on the current market price, if they think that you need to pay more margin, they will tell you to do so, which is called mark-to-market margin.
Types of Margin In The Futures And Options (F&O) Segment Of The Market
In the futures and options (F&O) segment of the market, we have two kinds of margin: Initial Margin and Exposure Margin.
1. Initial Margin
To trade in future or options, you have to provide a certain percentage of the total value of a contract, which is known as initial margin. In other words, it means the minimum amount of money you have to deposit to open a position in futures or options.
2. Exposure Margin
It means additional funds that a trader needs to have in his account in order to cover for potential risks of his positions in the F&O segment. This margin’s amount changes based on the size and risk of a trader’s position. If a trader has highly risky positions, he has to maintain a higher exposure margin.
Types Of Margin Are Collected For Options Contracts
Apart from the margins described above, two kinds of margins are collected for options contracts: Premium Margin and Assignment Margin.
1. Premium Margin
You need to pay a premium to buy a call or put option. So, before you start trading in options, your broker may require you to maintain a minimum margin to make sure that you have enough funds to pay a premium for the options you buy.
2. Assignment Margin
Suppose you sell a call option and the buyer decides to exercise it. Hence, you will have to provide the underlying stock of the option to the buyer. In such a situation, assignment margin ensures that you have sufficient collateral to cover if you are obligated to deliver the underlying stock to the buyer.
Conclusion
If you know about the different types of margins, you will be well prepared to take various kinds of positions in the market.
Apart from it, you should also know the interest charged on the margin trading facility (MTF) provided by brokers. Before you open a trading account, you should try to find the broker with the lowest MTF interest rate. If such a broker provides good service, you can sign up with him.
