Derivatives Trading Basics
by 5paisa Research Team Last Updated: 2022-06-16T00:58:59+05:30

Introduction

Have you ever applied for a loan? If yes, you know how the lender evaluates your financial profile and provides you with the money you asked for. They charge an interest rate to cover their establishment cost and inform you of the date by which you must return the amount. The same concept applies to stock and derivatives trading. This concept is known as margin trading. This article describes the definition and meaning of margin money in trading.

What is Margin Money in Trading?

Suppose you want to buy 1000 shares of XYZ, the current price of which is INR 100 apiece. So, you need INR 1 lakh. But, your trading account has a clear balance of INR 50,000, meaning you need INR 50,000 more to place the trade. You can get the additional fund in two ways - pour the money from your bank account or request your broker to give you the additional money. 

When your stockbroker gives you the additional money, it is known as margin money. You can use the margin money to take long or short intraday positions. You can also use the money to trade futures and options, commodities, currencies, and the like.

Who is Eligible to Get Margin Money?

Any investor or trader with a margin account can get the margin trading facility. For instance, 5paisa offers a free margin-enabled Demat and trading account to all investors fulfilling the minimum eligibility criteria. 

The margin depends on the broker. Different brokers provide different margins. And, you may need to maintain a minimum balance in your account to avail of the margin trading facility.

What Are The Types of Margin?

Margin is of four types - Initial Margin, Maintenance Margin, Variation Margin, and Margin Call. Let’s understand the role of each margin type in trading. 

Initial Margin

Initial margin refers to the margin amount you need to maintain in your account to initiate a future transaction. The initial margin is some percentage of the total contract value. Whether you go long or short in future, you need to maintain the initial margin. However, if you trade options, the initial margin will only be required for initiating long trades.  

Maintenance Margin

Maintenance margin refers to the minimum amount you need to keep in your account at all times to keep the futures positions valid. Brokers want you to keep the maintenance margin so that they can deduct the amount from your account in case your trades turn into losses.  

Margin Call

A margin call is a notice a stockbroker sends to an investor/ trader if their maintenance margin tumbles below the safe level. If you receive a margin call, you have to replenish your account with money to save your futures contracts from getting automatically sold and penalty being levied.

Variation Margin

When your maintenance margin falls below the desired level, and you receive a margin call, you need to top up your account. The difference between the initial margin and the available cash is known as the variation margin. For instance, if your maintenance margin is INR 10,000 and your available cash is INR 5,000, the variation margin will be INR 5,000.

The EndNote

Margin trading exposes you to a new era of trading. When combined with other features like free Demat and trading account opening and low brokerage fee, margin trading can give your strategies wings to expand and grow your capital wisely.

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