Article

Margin
June 07 , 2012

Margin is used in two related contexts while discussing share trading.

One use of margin is to denote the purchasing power in your trading account. This comes from different factors: first is the free cash lying in your account. But you may be having cash receivable from shares sold already (since the settlement happens only two working days after the order is placed) - this adds to your purchasing power. You may also have cash blocked, due to 'buy' orders already placed for shares - this reduces your purchasing power. Margin is calculated after taking all these factors into account, to calculate how much you can currently place an order for.

The second use of margin is in activities called margin trading or margin funding. While we discuss margin trading/margin funding in a separate topic, let's look at what this margin means. Here, you only notionally buy the share, in the sense that you reap gains when share price rises and pay up for losses if it falls. Say a Rs 100 share can rise or fall up to 20% in a day. To notionally buy this share, you put up only Rs 20 to cover for a possible loss on the first day. If share price rises to Rs.110 on Day 1, you can withdraw the profit, keeping only the 20% cover for a possible second day loss. But if share price fell to Rs 90 on Day 1, Rs 10 of your cover has eroded, and you need to pay to replenish that immediately. If you don't, your position is closed; and you do not have the share (notionally) any more. This Rs 20 with which you are effectively holding the share and participating in its gain or loss is called margin. Margins for different shares may vary, depending on how volatile their prices are. Margins for different shares are typically decided by the stock exchanges, and brokers may add a safety buffer over and above what the exchanges mandate.

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