Bette 
Imagine stepping into the world of trading, driven by the excitement of potential profits. One day, you encounter a request from your broker asking for more funds, leaving you confused. If you have ever experienced a margin call, you are probably familiar with the fact that it stems from margin requirements. Understanding why brokers ask for additional money and how this relates to risk management is crucial for traders, especially when dealing with derivatives. Two key terms to be aware of are SPAN Margin and Exposure Margin. These not only protect you but also safeguard the broader financial markets.
What is Margin Trading?
At its core, Margin trading allows investors to borrow money from brokers to buy more securities than their available cash would allow. The idea is that by leveraging your capital, you can increase potential returns, but this also raises the possibility of loss.
When you engage in margin trading, you are opening a special type of account, a margin account, that allows you to borrow money. The broker sets a limit based on the trading margin requirement, which is the percentage of the total trade value that you must fund yourself. Let’s break this down further.
For instance, say the market margin requirement is 50%, and you want to invest ₹1,00,000. If you only have ₹50,000, you can borrow the other ₹50,000 through the margin trading facility. If the stock price increases, you benefit from higher profits, but if it drops, you still owe your broker, and losses can be amplified.
For example, if your stocks rise to ₹1,20,000, you sell them through an investment app, repay the borrowed ₹50,000, and profit by ₹20,000. However, if the value drops to ₹80,000, you still owe ₹50,000, meaning a net loss of ₹20,000, excluding any interest.
What is the SPAN Margin?
The SPAN Margin (Standard Portfolio Analysis of Risk) is a risk-based margin system that evaluates your entire portfolio to predict the maximum probable loss in a single day. It factors in market volatility, time until expiry, interest rates, and asset prices. The goal of SPAN is to ensure that traders maintain enough funds to withstand any significant losses, promoting market stability.
How SPAN Works in Different Scenarios
To better understand, let’s look at some examples of margin trading in India:
Scenario 1: Nifty Futures Contract
Suppose you hold a Nifty futures contract worth ₹20,00,000. If the SPAN margin is set at 10%, you would calculate it like this:
SPAN Margin = Contract Value × SPAN Margin Percentage
= ₹20,00,000 × 0.10
= ₹2,00,000
In this case, your broker will require you to maintain ₹2,00,000 as a margin.
Scenario 2: Stock Options
Imagine you are selling stock options with a strike price of ₹1,000, and the SPAN margin requirement is 12%. If the stock lot size is 100:
Notional Value = Strike Price × Lot Size
= ₹1,000 × 100
= ₹1,00,000
SPAN Margin = Notional Value × 0.12
= ₹1,00,000 × 0.12
= ₹12,000
This is the amount you will need to keep as a margin for the trade.
Scenario 3: Complex Strategies
In cases where you are using a multi-leg strategy like an iron condor, different legs will have varying margin requirements. Say you buy one call and sell another, with SPAN margin amounts of ₹30,000 and ₹40,000, respectively. Your total SPAN margin would be ₹70,000, ensuring you are covered from potential large market swings.
What is the Exposure Margin?
In addition to the SPAN margin, brokers also require an exposure margin. This is a buffer to protect against market volatility, assessed by reviewing your total exposure across your portfolio. The more volatile your assets, the higher the margin.
Exposure Margin Calculations in Different Scenarios
Different types of trades demand different levels of exposure margin:
Scenario 1: Stock Futures
Let’s say you’re trading stock futures with a notional value of ₹3,00,000, and the exposure margin is set at 2%. The exposure margin in this case would be:
Exposure Margin = Contract Value × Exposure Margin Percentage
= ₹3,00,000 × 0.02
= ₹6,000
Scenario 2: Option Selling
Selling options usually attract a higher margin due to the risk. For example, if the notional value of the options is ₹5,00,000 and the exposure margin is 3%, the calculation would be:
Exposure Margin = ₹5,00,000 × 0.03
= ₹15,000
This higher margin reflects the potential volatility and associated risks of the contract.
Scenario 3: High Volatility Stocks
If you are trading a highly volatile stock worth ₹2,50,000, the exposure margin may be 5% due to its risky nature. So, you will need:
Exposure Margin = ₹2,50,000 × 0.05
= ₹12,500
More volatile stocks naturally require more margin, offering extra protection for both traders and brokers.
What is a Margin Call?
A margin call occurs when the value of your margin account falls below a certain threshold, as set by your broker. When this happens, the broker requires you to either deposit additional funds or sell some of your positions to restore the required balance.
Here is an example: Suppose you buy stocks worth ₹2,00,000 using ₹1,00,000 of your own money and ₹1,00,000 borrowed. If the stock value drops to ₹1,50,000, your equity drops to ₹50,000. If your broker requires a minimum equity of 30%, or ₹45,000, in this case, you are still in the clear. But if the stock price dips further to ₹1,30,000, your equity shrinks to ₹30,000, prompting a margin call to add more funds or liquidate positions.
Failing to meet a margin call on time can result in your broker selling your securities to recover the borrowed amount.
How Can You Manage Margins Effectively?
Effective margin management is critical for any successful trading strategy, especially when buying stocks on margin. Here are a few tips:
- Monitor Your Positions Regularly: Keep a close eye on your account and market movements to prevent surprises.
- Use Risk Management Tools: Many brokers provide risk management features within their MTF app, such as stop-loss orders and margin alerts.
- Don’t Over-Leverage: Although it may be tempting to borrow the maximum amount allowed, remember that leveraging can magnify losses just as easily as it can profits.
- Stay Informed About Margin Requirements: Margin rules can vary by broker and security type, so always ensure you know the specific requirements when buying stocks on a margin.
Conclusion
Understanding the mechanics of margin trading is essential for anyone trading derivatives or buying stocks on margin; by comprehending how SPAN margin and exposure margin work, traders can better manage risk and avoid the dreaded margin call. Whether using an MTF app or trading directly through a broker, having a solid understanding of these margins will help protect your investments and improve your overall trading strategy.
Before jumping into the world of margin trade, consult with your broker and ensure you have all the tools to manage your risk effectively. To begin your journey, the first step is to open Demat Account with a reliable broker, which will give you access to all the features you need to trade efficiently.
