What Are Margins? Why Do Stock Exchange Levy Margins in India?

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oi-Sunil

By Sunil Fernandes

Published: Saturday, November 15, 2014, 10:06 [IST]

Margins are nothing but the advance money that you pay to your broking firm to buy or sell a share. Margins are particularly levied in the futures market and there is an extensive list of companies and the per cent of margins that are levied on the shares of these companies.

It's first important to understand why margins are levied. Let's say you buy 1000 shares of Company A at a price of Rs 10. The total cost you are likely to pay is Rs 10,000. You have to pay this money after a couple of days. But, what if you bought the shares and now do not have money to pay. The brokerage firm has to honour its commitment as the seller has to be paid.

Therefore, what is done is an advance has to be paid by the customer when he buys a share, which is also called margin. In case he does not pay the amount then the shares and the advance paid would help the exchange to recover the money. That is why margin money is collected.

Margin Money in the Futures Market in India

Margin money is very much in vogue in the futures market, where you are not actually dealing with equity shares. The quantity of shares is large and to escape any downside risk margins ranging around 15 to 30 per cent depending on the volatility of stock is collected. The margin will help to hedge against any default risk from the customer.
Margins are not the same in the cash and derivatives market

Actually, there is no margins in the cash segment. It is actually a cash and carry kind of market. In the futures markets it is

different and as explained earlier would depend on the volatility of stock.

Marked to Market Margin

In the futures market a term that is very commonly used is the marked to market margin. Let's say that you bought a futures contract of Reliance at Rs 1000 and the quantity was 100 shares. Now, if the shares fall to 950, there is a marked to market margin of Rs 5000. This is the notional loss also called MTM and is shown at the end of the day.

Conclusion

Margin has become a very essential part of trading and is likely to be there. Depending on the volatility of a stock margin is levied. You cannot escape margins if you are trading in the futures segment of the capital markets in India. A list on the per centage of margins levied is released by the exchanges. If the volatility is high it is highly possible that the exchange would increase the margins. Margins are revised frequently by the authorities.

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