{"id":21140,"date":"2022-03-08T14:38:02","date_gmt":"2022-03-08T14:38:02","guid":{"rendered":"https://www.5paisa.com/finschool/?post_type=markets\u0026#038;p=21140"},"modified":"2026-06-05T10:21:47","modified_gmt":"2026-06-05T04:51:47","slug":"understanding-margins","status":"publish","type":"markets","link":"https://www.5paisa.com/finschool/course/equity-derivatives-course/understanding-margins/","title":{"rendered":"What Are Margins In Stock Market \u0026#038; How Do They Work?"},"content":{"rendered":"\u003cdiv data-elementor-type=\u0022wp-post\u0022 data-elementor-id=\u002221140\u0022 class=\u0022elementor elementor-21140\u0022\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\u0022 data-id=\u002223ba90b\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container 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data-title-link=\u0022study-tab\u0022\u003e\u003cp\u003e\u003cdiv class=\u0027white\u0027 style=\u0027background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;\u0027\u003e\u003cdiv id=\u0027text_slider\u0027 class=\u0027owl-carousel sa_owl_theme owl-pagination-true\u0027 data-slider-id=\u0027text_slider\u0027 style=\u0027visibility: visible;visibility:visible;\u0027\u003e\u003cdiv id=\u0027text_slider_slide01\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Introduction-to-Margins\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2\u003e\u003cstrong\u003e9.1 Introduction To Margins\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cimg fetchpriority=\u0022high\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-63957 size-full\u0022 src=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Introduction-to-Margins.png\u0022 alt=\u0022Introduction to Margins\u0022 width=\u0022999\u0022 height=\u0022875\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Introduction-to-Margins.png 999w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-300x263.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-768x673.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-50x44.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-100x88.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-150x131.png 150w\u0022 sizes=\u0022(max-width: 999px) 100vw, 999px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003eJust as we are faced with day to day uncertainties pertaining to weather, health, traffic etc and take steps to minimize the uncertainties, so also in the stock markets, there is uncertainty in the movement of share prices.\u003c/p\u003e\u003cp\u003eThis uncertainty leading to risk is sought to be addressed by margining systems of stock markets. Suppose an investor, purchases 10,000 shares of ‘abc’ company at Rs.300/- on January 1, 2022. Investor has to give the purchase amount of Rs.30,00,000/- (10000 x 300) to his broker on or before January 2, 2022. Broker, in turn, has to give this money to stock exchange on January 3, 2022.\u003c/p\u003e\u003cp\u003eThere is always a small chance that the investor may not be able to bring the required money by required date. As an advance for buying the shares, investor is required to pay a portion of the total amount of Rs.30,00,000/- to the broker at the time of placing the buy order. Stock exchange in turn collects similar amount from the broker upon execution of the order. \u003cstrong\u003eThis initial token payment is called margin.\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eRemember, for every buyer there is a seller and if the buyer does not bring the money, seller may not get his / her money and vice versa. Therefore, margin is levied on the seller also to ensure that he / she gives the 10000 shares sold to the broker who in turn gives it to the stock exchange. Margin payments ensure that each investor is serious about buying or selling shares.\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003eExample-\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eIn the above example, assume that margin was 15%. That is investor has to give Rs.4,50,000/-(15% of Rs.30,00,000/) to the broker before buying. Now suppose that investor bought the shares at 11 am on January 1, 2022. Assume that by the end of the day price of the share falls by Rs.50 -. That is total value of the shares has come down to Rs.25,00,000/-. That is buyer has suffered a notional loss of Rs.2,50,000/-. In our example buyer has paid Rs.4,50,000/- as margin but the notional loss, because of fall in price, is Rs.500000/-. That is notional loss is more than the margin given.\u003c/p\u003e\u003cp\u003eIn such a situation, the buyer may not want to pay Rs.30,00,000/- for the shares whose value has come down to Rs.25,00,000/-. Similarly, if the price has gone up by Rs.50/-, the seller may not want to give the shares at Rs.30,00,000/-. To ensure that both buyers and sellers fulfill their obligations irrespective of price movements, notional losses are also need to be collected.\u003c/p\u003e\u003cp\u003ePrices of shares keep on moving every day. Margins ensure that buyers bring money and sellers bring shares to complete their obligations even though the prices have moved down or up.\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide02\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Mark-To-Market-Margin\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2\u003e9.2 Mark to Market Margin\u003c/h2\u003e\u003cp\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-63958 size-full\u0022 src=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin.png\u0022 alt=\u0022Mark to Market Margin\u0022 width=\u0022990\u0022 height=\u0022847\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin.png 990w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-300x257.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-768x657.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-50x43.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-100x86.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-150x128.png 150w\u0022 sizes=\u0022(max-width: 990px) 100vw, 990px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003eIn the futures market, all trades happen through an exchange. The exchange in return takes the guarantee of settling all the trades. By guarantee, it means the exchange makes sure you get your money if you are entitled. This also means they ensure they collect the money from the party who is supposed to pay up.\u003c/p\u003e\u003cp\u003eSo how does the exchange make sure this works seamlessly? Well, they make this happen using –\u003c/p\u003e\u003col\u003e\u003cli\u003eCollecting the margins\u003c/li\u003e\u003cli\u003eMarking the daily profits or losses to market (also called M2M)\u003c/li\u003e\u003c/ol\u003e\u003cp\u003eConcept of margin we have already understood. Now lets understand the process of M2M. Mark to Market is a process in which gains and losses are settled on each trading day. This means that the value of the contract is marked to its current market value.\u003c/p\u003e\u003cp\u003eBasically, MTM is calculated at the end of the day on all open positions by comparing transaction price with the closing price of the share for the day. For example, Lets assume that the buyer purchased 100 shares @ Rs.100/- at 11 am on January 1, 2022. If close price of the shares on that day happens to be Rs.75/-, then the buyer faces a notional loss of Rs.25,000/ – on his buy position. In technical terms this loss is called as MTM loss and is payable by January 2, 2008 (that is next day of the trade).\u003c/p\u003e\u003cp\u003eIn case price of the share falls further by the end of January 2, 2008 to Rs. 70/-, then buy position would show a further loss of Rs.5,000/-. This MTM loss is payable.\u003c/p\u003e\u003cp\u003eIn case, on a given day, buy and sell quantity in a share are equal, that is net quantity position is zero, but there could still be a notional loss / gain (due to difference between the buy and sell values), such notional loss also is considered for calculating the MTM payable.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eExample of Daily Calculation of MTM\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eAssume on 1st Dec 2021 at around 11:30 AM; you decide to buy Britannia Futures contract at Rs.3400/-. The Lot size is 200. 4 days later, on 4th Dec 2021, you decide to square off the position at 2:15 PM at Rs.3500/- . This a profitable trade –\u003c/p\u003e\u003cp\u003eBuy Price = Rs.3400\u003c/p\u003e\u003cp\u003eSell Price = Rs.3550\u003c/p\u003e\u003cp\u003eProfit per share = (3550 -3400) = Rs.150/-\u003c/p\u003e\u003cp\u003eTotal Profit = 150 * 200\u003c/p\u003e\u003cp\u003e= Rs.30000/-\u003c/p\u003e\u003cp\u003eThe trade was held for 4 working days. Each day the futures contract is held, the profits or loss is marked to market. While marking to market, the previous day closing price is taken as the reference rate to calculate the profit or losses.\u003c/p\u003e\u003cp\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022size-full wp-image-21099 aligncenter entered lazyloaded\u0022 src=\u0022https://web.archive.org/web/20260212154217im_/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png\u0022 alt=\u0022\u0022 width=\u0022730\u0022 height=\u0022632\u0022 data-lazy-srcset=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png 730w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-300x260.png 300w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-150x130.png 150w\u0022 data-lazy-sizes=\u0022(max-width: 730px) 100vw, 730px\u0022 data-lazy-src=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png\u0022 data-ll-status=\u0022loaded\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png 730w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-300x260.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-150x130.png 150w\u0022 sizes=\u0022(max-width: 730px) 100vw, 730px\u0022 /\u003e\u003c/p\u003e\u003cp\u003eThe table above shows the futures price movement over the 4 days the contract was held. Lets understand how things happen on a day to day basis to understand how M2M works\u003cbr /\u003eOn Day 1 at 11:30 AM, the futures contract was purchased at Rs.3400, clearly after the contract was purchased, the price has gone up further to close at Rs.3450. Hence profit for the day is 3450 minus 3400 = Rs.50 per share. Since the lot size is 200, the net profit for the day is 50*200 = Rs.10000.\u003cbr /\u003eHence the exchange ensures (via the broker) that Rs.1000 is credited to your trading account at the end of the day.\u003cbr /\u003e1. But where is this money coming from?\u003c/p\u003e\u003cp\u003eObviously, it is coming from the counterparty. Which means the exchange is also ensuring that the counterparty is paying up Rs.1000/- towards his loss\u003c/p\u003e\u003cp\u003e2. But how does the exchange ensure they get this money from the party who is supposed to pay up?\u003c/p\u003e\u003cp\u003eObviously, through the margins that are deposited at the time of initiating the trade.\u003c/p\u003e\u003cp\u003eAnother important aspect from an accounting perspective, the futures buy price is no longer treated as Rs.3400 but instead, it will be considered as Rs.3450 (closing price of the day). Why is that so, you may ask? The profit earned for the day has been given to you already using crediting the trading account. So you are fair and square for the day, and the next day is considered a fresh start. Hence the buy price is now considered at Rs.3450, which is the closing price of the day.\u003c/p\u003e\u003cp\u003eOn day 2, the futures closed at Rs.3370, which is a loss. The day’s loss would be (3370-3450) i.e. Rs.80 per share or Rs.16000 net loss. The loss that you are entitle to bear is debited from your trading account, and the buy price is reset to the day’s closing price, i.e. 3370.\u003c/p\u003e\u003cp\u003e\u003cbr /\u003eOn day 3, the futures closed at Rs.3500 which means that there is a profit of Rs.26000 (3500 – 3370* 200). The profit will get credited to your account. Also, the buy price is now reset to Rs.3500.\u003c/p\u003e\u003cp\u003eOn day 4, the trader did not continue to hold the position through the day but rather decided to square off the position mid-day 2:15 PM at Rs.3550. Hence concerning the previous day’s close, he again made a gain. That would be 3550-3500 Rs.50 *200= Rs.1000. Needless to say, after the square off, it does not matter where the futures price goes as the trader has squared off his position.\u003c/p\u003e\u003cp\u003eTabular summary of the same –\u003c/p\u003e\u003cp\u003e\u003cimg loading=\u0022lazy\u0022 decoding=\u0022async\u0022 class=\u0022size-full wp-image-21100 aligncenter entered lazyloaded\u0022 src=\u0022https://web.archive.org/web/20260212154217im_/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M.png\u0022 alt=\u0022\u0022 width=\u0022888\u0022 height=\u0022355\u0022 data-lazy-srcset=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M.png 888w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-300x120.png 300w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-768x307.png 768w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-150x60.png 150w\u0022 data-lazy-sizes=\u0022(max-width: 888px) 100vw, 888px\u0022 data-lazy-src=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M.png\u0022 data-ll-status=\u0022loaded\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/M2M.png 888w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-300x120.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-768x307.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-150x60.png 150w\u0022 sizes=\u0022(max-width: 888px) 100vw, 888px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide03\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Other-Margins-In-Derivatives-Segment\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2\u003e9.3 \u003cstrong\u003eOther Margins In Derivatives Segment\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cimg loading=\u0022lazy\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-63959 size-full\u0022 src=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market.png\u0022 alt=\u0022Other-Margins-in-Derivative-Market\u0022 width=\u00221006\u0022 height=\u0022949\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market.png 1006w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-300x283.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-768x724.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-50x47.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-100x94.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-150x142.png 150w\u0022 sizes=\u0022(max-width: 1006px) 100vw, 1006px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003eMargins on both Futures and Options contracts comprise of the following:\u003c/p\u003e\u003cp\u003e1) Initial Margin\u003c/p\u003e\u003cp\u003e2) Exposure margin\u003c/p\u003e\u003cp\u003eIn addition to these margins, in respect of options contracts the following additional margins are collected:\u003c/p\u003e\u003cp\u003e1) Premium Margin\u003c/p\u003e\u003cp\u003e2) Assignment Margin\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003eInitial Margin Calculation\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003e\u003cbr /\u003eInitial margin for F\u0026amp;O segment is calculated on a portfolio (a collection of futures and option positions) based approach. The margin calculation is carried out using a software called – SPAN (Standard Portfolio Analysis of Risk). It is a product developed by Chicago Mercantile Exchange (CME) and is extensively used by leading stock exchanges of the world.\u003cbr /\u003eSPAN uses scenario-based approach to arrive at margins. Value of futures and options positions depend on, among others, price of the security in the cash market and volatility of the security in cash market. As you would agree, both price and volatility keep changing.\u003cbr /\u003eTo put it simply, SPAN generates about 16 different scenarios by assuming different values to the price and volatility. For each of these scenarios, possible loss that the portfolio would suffer is calculated. The initial margin required to be paid by the investor would be equal to the highest loss the portfolio would suffer in any of the scenarios considered. The margin is monitored and collected at the time of placing the buy / sell order.\u003cbr /\u003eThe SPAN margins are revised 6 times in a day – once at the beginning of the day, 4 times during market hours and finally at the end of the day. Obviously, higher the volatility, higher the margins.\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003eExposure Margin Calculation\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eIn addition to initial / SPAN margin, exposure margin is also collected. Exposure margins in respect of index futures and index option sell positions is 3% of the notional value.\u003c/p\u003e\u003cp\u003eFor futures on individual securities and sell positions in options on individual securities, the exposure margin is higher of 5% or 1.5 standard deviation of the LN returns of the security (in the underlying cash market) over the last 6 months period and is applied on the notional value of position.\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003ePremium \u0026amp; Assignment Margin Calculation\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eIn addition to Initial Margin, a premium margin is charged to buyers of option contracts. The premium margin is paid by the buyers of the options contracts and is equal to the value of the options premium multiplied by the quantity of options purchased.\u003c/p\u003e\u003cp\u003eFor example, if 1000 call options on ABC Ltd are purchased at Rs. 20/-, and the investor has no other positions, then the premium margin is Rs. 20,000. The margin is to be paid at the time trade. Assignment Margin is collected on assignment from the sellers of the contracts.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003cscript type=\u0027text/javascript\u0027\u003ejQuery(document).ready(function()  {jQuery(\u0027#text_slider\u0027).owlCarousel({items  :  1,smartSpeed  :  400,autoplay  :  false,autoplayHoverPause  :  false,smartSpeed  :  400,fluidSpeed  :  400,autoplaySpeed  :  400,navSpeed  :  400,dotsSpeed  :  400,dotsEach  :  1,loop  :  false,nav  :  true,navText  :  [\u0027Previous\u0027,\u0027Next\u0027],dots  :  true,responsiveRefreshRate  :  200,slideBy  :  1,mergeFit  :  true,autoHeight  :  true,mouseDrag  :  false,touchDrag  :  true});jQuery(\u0027#text_slider\u0027).css(\u0027visibility\u0027, \u0027visible\u0027);var  owl_goto  =  jQuery(\u0027#text_slider\u0027);jQuery(\u0027.text_slider_goto1\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  0);});jQuery(\u0027.text_slider_goto2\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  1);});jQuery(\u0027.text_slider_goto3\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  2);});var  resize_76850  =  jQuery(\u0027.owl-carousel\u0027);resize_76850.on(\u0027initialized.owl.carousel\u0027,  function(e)  {if  (typeof(Event)  === \u0027function\u0027)  {window.dispatchEvent(new  Event(\u0027resize\u0027));}  else  {var  evt  =  window.document.createEvent(\u0027UIEvents\u0027);evt.initUIEvent(\u0027resize\u0027,  true,  false,  window,  0);window.dispatchEvent(evt);}});});\u003c/script\u003e\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0022slides-tab\u0022 class=\u0022clearfix eael-tab-content-item \u0022 data-title-link=\u0022slides-tab\u0022\u003e\u003cp\u003e\u003cdiv class=\u0027white\u0027 style=\u0027background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;\u0027\u003e\u003cdiv id=\u0027text_slider\u0027 class=\u0027owl-carousel sa_owl_theme owl-pagination-true\u0027 data-slider-id=\u0027text_slider\u0027 style=\u0027visibility: visible;visibility:visible;\u0027\u003e\u003cdiv id=\u0027text_slider_slide01\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Introduction-to-Margins\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2\u003e\u003cstrong\u003e9.1 Introduction To Margins\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cimg fetchpriority=\u0022high\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-63957 size-full\u0022 src=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Introduction-to-Margins.png\u0022 alt=\u0022Introduction to Margins\u0022 width=\u0022999\u0022 height=\u0022875\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Introduction-to-Margins.png 999w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-300x263.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-768x673.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-50x44.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-100x88.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Introduction-to-Margins-150x131.png 150w\u0022 sizes=\u0022(max-width: 999px) 100vw, 999px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003eJust as we are faced with day to day uncertainties pertaining to weather, health, traffic etc and take steps to minimize the uncertainties, so also in the stock markets, there is uncertainty in the movement of share prices.\u003c/p\u003e\u003cp\u003eThis uncertainty leading to risk is sought to be addressed by margining systems of stock markets. Suppose an investor, purchases 10,000 shares of ‘abc’ company at Rs.300/- on January 1, 2022. Investor has to give the purchase amount of Rs.30,00,000/- (10000 x 300) to his broker on or before January 2, 2022. Broker, in turn, has to give this money to stock exchange on January 3, 2022.\u003c/p\u003e\u003cp\u003eThere is always a small chance that the investor may not be able to bring the required money by required date. As an advance for buying the shares, investor is required to pay a portion of the total amount of Rs.30,00,000/- to the broker at the time of placing the buy order. Stock exchange in turn collects similar amount from the broker upon execution of the order. \u003cstrong\u003eThis initial token payment is called margin.\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eRemember, for every buyer there is a seller and if the buyer does not bring the money, seller may not get his / her money and vice versa. Therefore, margin is levied on the seller also to ensure that he / she gives the 10000 shares sold to the broker who in turn gives it to the stock exchange. Margin payments ensure that each investor is serious about buying or selling shares.\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003eExample-\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eIn the above example, assume that margin was 15%. That is investor has to give Rs.4,50,000/-(15% of Rs.30,00,000/) to the broker before buying. Now suppose that investor bought the shares at 11 am on January 1, 2022. Assume that by the end of the day price of the share falls by Rs.50 -. That is total value of the shares has come down to Rs.25,00,000/-. That is buyer has suffered a notional loss of Rs.2,50,000/-. In our example buyer has paid Rs.4,50,000/- as margin but the notional loss, because of fall in price, is Rs.500000/-. That is notional loss is more than the margin given.\u003c/p\u003e\u003cp\u003eIn such a situation, the buyer may not want to pay Rs.30,00,000/- for the shares whose value has come down to Rs.25,00,000/-. Similarly, if the price has gone up by Rs.50/-, the seller may not want to give the shares at Rs.30,00,000/-. To ensure that both buyers and sellers fulfill their obligations irrespective of price movements, notional losses are also need to be collected.\u003c/p\u003e\u003cp\u003ePrices of shares keep on moving every day. Margins ensure that buyers bring money and sellers bring shares to complete their obligations even though the prices have moved down or up.\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide02\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Mark-To-Market-Margin\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2\u003e9.2 Mark to Market Margin\u003c/h2\u003e\u003cp\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-63958 size-full\u0022 src=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin.png\u0022 alt=\u0022Mark to Market Margin\u0022 width=\u0022990\u0022 height=\u0022847\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin.png 990w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-300x257.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-768x657.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-50x43.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-100x86.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Mark-to-Market-Margin-150x128.png 150w\u0022 sizes=\u0022(max-width: 990px) 100vw, 990px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003eIn the futures market, all trades happen through an exchange. The exchange in return takes the guarantee of settling all the trades. By guarantee, it means the exchange makes sure you get your money if you are entitled. This also means they ensure they collect the money from the party who is supposed to pay up.\u003c/p\u003e\u003cp\u003eSo how does the exchange make sure this works seamlessly? Well, they make this happen using –\u003c/p\u003e\u003col\u003e\u003cli\u003eCollecting the margins\u003c/li\u003e\u003cli\u003eMarking the daily profits or losses to market (also called M2M)\u003c/li\u003e\u003c/ol\u003e\u003cp\u003eConcept of margin we have already understood. Now lets understand the process of M2M. Mark to Market is a process in which gains and losses are settled on each trading day. This means that the value of the contract is marked to its current market value.\u003c/p\u003e\u003cp\u003eBasically, MTM is calculated at the end of the day on all open positions by comparing transaction price with the closing price of the share for the day. For example, Lets assume that the buyer purchased 100 shares @ Rs.100/- at 11 am on January 1, 2022. If close price of the shares on that day happens to be Rs.75/-, then the buyer faces a notional loss of Rs.25,000/ – on his buy position. In technical terms this loss is called as MTM loss and is payable by January 2, 2008 (that is next day of the trade).\u003c/p\u003e\u003cp\u003eIn case price of the share falls further by the end of January 2, 2008 to Rs. 70/-, then buy position would show a further loss of Rs.5,000/-. This MTM loss is payable.\u003c/p\u003e\u003cp\u003eIn case, on a given day, buy and sell quantity in a share are equal, that is net quantity position is zero, but there could still be a notional loss / gain (due to difference between the buy and sell values), such notional loss also is considered for calculating the MTM payable.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eExample of Daily Calculation of MTM\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eAssume on 1st Dec 2021 at around 11:30 AM; you decide to buy Britannia Futures contract at Rs.3400/-. The Lot size is 200. 4 days later, on 4th Dec 2021, you decide to square off the position at 2:15 PM at Rs.3500/- . This a profitable trade –\u003c/p\u003e\u003cp\u003eBuy Price = Rs.3400\u003c/p\u003e\u003cp\u003eSell Price = Rs.3550\u003c/p\u003e\u003cp\u003eProfit per share = (3550 -3400) = Rs.150/-\u003c/p\u003e\u003cp\u003eTotal Profit = 150 * 200\u003c/p\u003e\u003cp\u003e= Rs.30000/-\u003c/p\u003e\u003cp\u003eThe trade was held for 4 working days. Each day the futures contract is held, the profits or loss is marked to market. While marking to market, the previous day closing price is taken as the reference rate to calculate the profit or losses.\u003c/p\u003e\u003cp\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022size-full wp-image-21099 aligncenter entered lazyloaded\u0022 src=\u0022https://web.archive.org/web/20260212154217im_/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png\u0022 alt=\u0022\u0022 width=\u0022730\u0022 height=\u0022632\u0022 data-lazy-srcset=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png 730w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-300x260.png 300w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-150x130.png 150w\u0022 data-lazy-sizes=\u0022(max-width: 730px) 100vw, 730px\u0022 data-lazy-src=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png\u0022 data-ll-status=\u0022loaded\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day.png 730w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-300x260.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Profit-loss-Each-Day-150x130.png 150w\u0022 sizes=\u0022(max-width: 730px) 100vw, 730px\u0022 /\u003e\u003c/p\u003e\u003cp\u003eThe table above shows the futures price movement over the 4 days the contract was held. Lets understand how things happen on a day to day basis to understand how M2M works\u003cbr /\u003eOn Day 1 at 11:30 AM, the futures contract was purchased at Rs.3400, clearly after the contract was purchased, the price has gone up further to close at Rs.3450. Hence profit for the day is 3450 minus 3400 = Rs.50 per share. Since the lot size is 200, the net profit for the day is 50*200 = Rs.10000.\u003cbr /\u003eHence the exchange ensures (via the broker) that Rs.1000 is credited to your trading account at the end of the day.\u003cbr /\u003e1. But where is this money coming from?\u003c/p\u003e\u003cp\u003eObviously, it is coming from the counterparty. Which means the exchange is also ensuring that the counterparty is paying up Rs.1000/- towards his loss\u003c/p\u003e\u003cp\u003e2. But how does the exchange ensure they get this money from the party who is supposed to pay up?\u003c/p\u003e\u003cp\u003eObviously, through the margins that are deposited at the time of initiating the trade.\u003c/p\u003e\u003cp\u003eAnother important aspect from an accounting perspective, the futures buy price is no longer treated as Rs.3400 but instead, it will be considered as Rs.3450 (closing price of the day). Why is that so, you may ask? The profit earned for the day has been given to you already using crediting the trading account. So you are fair and square for the day, and the next day is considered a fresh start. Hence the buy price is now considered at Rs.3450, which is the closing price of the day.\u003c/p\u003e\u003cp\u003eOn day 2, the futures closed at Rs.3370, which is a loss. The day’s loss would be (3370-3450) i.e. Rs.80 per share or Rs.16000 net loss. The loss that you are entitle to bear is debited from your trading account, and the buy price is reset to the day’s closing price, i.e. 3370.\u003c/p\u003e\u003cp\u003e\u003cbr /\u003eOn day 3, the futures closed at Rs.3500 which means that there is a profit of Rs.26000 (3500 – 3370* 200). The profit will get credited to your account. Also, the buy price is now reset to Rs.3500.\u003c/p\u003e\u003cp\u003eOn day 4, the trader did not continue to hold the position through the day but rather decided to square off the position mid-day 2:15 PM at Rs.3550. Hence concerning the previous day’s close, he again made a gain. That would be 3550-3500 Rs.50 *200= Rs.1000. Needless to say, after the square off, it does not matter where the futures price goes as the trader has squared off his position.\u003c/p\u003e\u003cp\u003eTabular summary of the same –\u003c/p\u003e\u003cp\u003e\u003cimg loading=\u0022lazy\u0022 decoding=\u0022async\u0022 class=\u0022size-full wp-image-21100 aligncenter entered lazyloaded\u0022 src=\u0022https://web.archive.org/web/20260212154217im_/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M.png\u0022 alt=\u0022\u0022 width=\u0022888\u0022 height=\u0022355\u0022 data-lazy-srcset=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M.png 888w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-300x120.png 300w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-768x307.png 768w, https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-150x60.png 150w\u0022 data-lazy-sizes=\u0022(max-width: 888px) 100vw, 888px\u0022 data-lazy-src=\u0022https://web.archive.org/web/20260212154217/https://www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M.png\u0022 data-ll-status=\u0022loaded\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/M2M.png 888w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-300x120.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-768x307.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/M2M-150x60.png 150w\u0022 sizes=\u0022(max-width: 888px) 100vw, 888px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide03\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Other-Margins-In-Derivatives-Segment\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch2\u003e9.3 \u003cstrong\u003eOther Margins In Derivatives Segment\u003c/strong\u003e\u003c/h2\u003e\u003cp\u003e\u003cimg loading=\u0022lazy\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-63959 size-full\u0022 src=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market.png\u0022 alt=\u0022Other-Margins-in-Derivative-Market\u0022 width=\u00221006\u0022 height=\u0022949\u0022 srcset=\u0022https://www.5paisa.com/hindi/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market.png 1006w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-300x283.png 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-768x724.png 768w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-50x47.png 50w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-100x94.png 100w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/03/Other-Margins-in-Derivative-Market-150x142.png 150w\u0022 sizes=\u0022(max-width: 1006px) 100vw, 1006px\u0022 /\u003e\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003eMargins on both Futures and Options contracts comprise of the following:\u003c/p\u003e\u003cp\u003e1) Initial Margin\u003c/p\u003e\u003cp\u003e2) Exposure margin\u003c/p\u003e\u003cp\u003eIn addition to these margins, in respect of options contracts the following additional margins are collected:\u003c/p\u003e\u003cp\u003e1) Premium Margin\u003c/p\u003e\u003cp\u003e2) Assignment Margin\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003eInitial Margin Calculation\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003e\u003cbr /\u003eInitial margin for F\u0026amp;O segment is calculated on a portfolio (a collection of futures and option positions) based approach. The margin calculation is carried out using a software called – SPAN (Standard Portfolio Analysis of Risk). It is a product developed by Chicago Mercantile Exchange (CME) and is extensively used by leading stock exchanges of the world.\u003cbr /\u003eSPAN uses scenario-based approach to arrive at margins. Value of futures and options positions depend on, among others, price of the security in the cash market and volatility of the security in cash market. As you would agree, both price and volatility keep changing.\u003cbr /\u003eTo put it simply, SPAN generates about 16 different scenarios by assuming different values to the price and volatility. For each of these scenarios, possible loss that the portfolio would suffer is calculated. The initial margin required to be paid by the investor would be equal to the highest loss the portfolio would suffer in any of the scenarios considered. The margin is monitored and collected at the time of placing the buy / sell order.\u003cbr /\u003eThe SPAN margins are revised 6 times in a day – once at the beginning of the day, 4 times during market hours and finally at the end of the day. Obviously, higher the volatility, higher the margins.\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003eExposure Margin Calculation\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eIn addition to initial / SPAN margin, exposure margin is also collected. Exposure margins in respect of index futures and index option sell positions is 3% of the notional value.\u003c/p\u003e\u003cp\u003eFor futures on individual securities and sell positions in options on individual securities, the exposure margin is higher of 5% or 1.5 standard deviation of the LN returns of the security (in the underlying cash market) over the last 6 months period and is applied on the notional value of position.\u003c/p\u003e\u003ch3\u003e\u003cstrong\u003ePremium \u0026amp; Assignment Margin Calculation\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003eIn addition to Initial Margin, a premium margin is charged to buyers of option contracts. The premium margin is paid by the buyers of the options contracts and is equal to the value of the options premium multiplied by the quantity of options purchased.\u003c/p\u003e\u003cp\u003eFor example, if 1000 call options on ABC Ltd are purchased at Rs. 20/-, and the investor has no other positions, then the premium margin is Rs. 20,000. The margin is to be paid at the time trade. Assignment Margin is collected on assignment from the sellers of the contracts.\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003cscript type=\u0027text/javascript\u0027\u003ejQuery(document).ready(function()  {jQuery(\u0027#text_slider\u0027).owlCarousel({items  :  1,smartSpeed  :  400,autoplay  :  false,autoplayHoverPause  :  false,smartSpeed  :  400,fluidSpeed  :  400,autoplaySpeed  :  400,navSpeed  :  400,dotsSpeed  :  400,dotsEach  :  1,loop  :  false,nav  :  true,navText  :  [\u0027Previous\u0027,\u0027Next\u0027],dots  :  true,responsiveRefreshRate  :  200,slideBy  :  1,mergeFit  :  true,autoHeight  :  true,mouseDrag  :  false,touchDrag  :  true});jQuery(\u0027#text_slider\u0027).css(\u0027visibility\u0027, \u0027visible\u0027);var  owl_goto  =  jQuery(\u0027#text_slider\u0027);jQuery(\u0027.text_slider_goto1\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  0);});jQuery(\u0027.text_slider_goto2\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  1);});jQuery(\u0027.text_slider_goto3\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  2);});var  resize_76850  =  jQuery(\u0027.owl-carousel\u0027);resize_76850.on(\u0027initialized.owl.carousel\u0027,  function(e)  {if  (typeof(Event)  === \u0027function\u0027)  {window.dispatchEvent(new  Event(\u0027resize\u0027));}  else  {var  evt  =  window.document.createEvent(\u0027UIEvents\u0027);evt.initUIEvent(\u0027resize\u0027,  true,  false,  window,  0);window.dispatchEvent(evt);}});});\u003c/script\u003e\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0022videos-tab\u0022 class=\u0022clearfix eael-tab-content-item \u0022 data-title-link=\u0022videos-tab\u0022\u003e\u003cp\u003e\u003cdiv id=\u0027sa_invalid_postid\u0027\u003eSlide Anything shortcode error: A valid ID has not been provided\u003c/div\u003e\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e","protected":false},"excerpt":{"rendered":"\u003cp\u003eStudy Slides Videos Slide Anything shortcode error: A valid ID has not been provided\u003c/p\u003e","protected":false},"author":1,"featured_media":0,"parent":21115,"menu_order":9,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-21140","markets","type-markets","status-publish","format-standard","hentry"],"acf":[],"_links":{"self":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/markets/21140","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/markets"}],"about":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/types/markets"}],"author":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/users/1"}],"replies":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/comments?post=21140"}],"version-history":[{"count":21,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/markets/21140/revisions"}],"predecessor-version":[{"id":76857,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/markets/21140/revisions/76857"}],"up":[{"embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/markets/21115"}],"wp:attachment":[{"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/media?parent=21140"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https://www.5paisa.com/finschool/wp-json/wp/v2/categories?post=21140"}],"curies":[{"name":"wp","href":"https://api.w.org/{rel}","templated":true}]}}