What are the Different Types of Margins?

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There are several types of margins that you need to know if you want to excel in the financial market. Read on to know more about the concept of margin, different margin types and its risks and rewards.

Types of Margin Accounts

There are primarily two types of margin accounts offered by brokers in India: Cash accounts with margin and Margin accounts.

  • Cash Accounts with Margin: This account lets you borrow a limited amount against your existing funds to buy securities. The broker, who gives you the loan, provides you with a specific margin limit based on the value of your holdings. This margin type is best for conservative traders who do not want to take excessive risks.

Different Types of Margins

  • Variation Margin: This margin type is based on the daily profit or loss on your open positions. It provides protection by ensuring that the exposures due to market movement between margin calls will be limited. At the end of each trading day, the gains or losses are added or deducted from your account balance, respectively. This process continues daily until you close your position.
  • Gross Exposure Margin: The gross exposure margin is the total value of all your open positions in the market. This margin type helps control the overall risk in your portfolio by limiting the total exposure.
  • Peak Margin :Peak margin is the highest margin requirement imposed during the trading day to mitigate intraday risks
  • Delivery Margin:Delivery margin is required for trades intended for settlement by delivery, ensuring sufficient funds or securities are available.
  • MTM Margin: MTM (Mark to Market) margin involves daily settlement of profits or losses based on the market value of securities.
  • ELM (Extreme Loss Margin): ELM is an additional margin to cover extreme market volatility, providing a buffer against sudden price movements.

     

  • VAR (Value At Risk) Margin: VAR margin quantifies the potential loss in the value of a security or portfolio under normal market conditions.
  • Premium Margin: Premium margin is required for options trading, covering the premium payable on the contract.

     

  • Mark to Market Margin:Mark to Market margin adjusts the account balance daily based on the market value of held securities.

     

  • Exposure Margin: Exposure margin limits the overall exposure of a portfolio, controlling the maximum risk taken by an investor.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

What is Margin Classification?

Answer Field

Margin classification categorizes the types of margins required by brokers, such as initial, maintenance, and variation margins, based on trading activities and regulatory requirements.

Is Margin Trading Risky?

Answer Field

Yes, margin trading is risky as it amplifies both potential gains and losses, and can result in significant debt if investments decline

What is the difference between gross margin and net margin?

Answer Field
  1. Gross margin is the difference between sales and the cost of goods sold, while net margin is the profit after all expenses have been deducted from sales.

Are there specific margins for different asset classes like stocks, futures, and options?

Answer Field

Yes, different asset classes like stocks, futures, and options have specific margin requirements set by brokers and regulatory authorities to manage risk.

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