26 Dec, 2017

The Margin and its efficient utililization for Indian financial markets

The margin and its efficient utililization for Indian financial markets

The margin is a fundamental term and the key point for trading. The marginal amount measures our trading. This write up is based on all about the term margin. There are some traders they are utilizing the margin without any knowledge this is not fair because we should know about our money. If you don’t take it in an efficient way you will definitely fail in trade. If you are seriously take each position then no need to bother about the fund. And the efficient utilization of money and time is also leads to a better trade.  

Initial and maintenance margin these are the two types of margin. The amount of funds has to be deposited to establish the account for a position is called initial margin. The amount that a trader will need to hold a position is called marginal amount. The initial margin is greater than the maintenance and in most cases maintenance is 30% less than initial.

Margin in MCX trading

The margin is the net amount that utilized for your trade and it is transferred to your broker before entering in to trade. The margin need is 5–10% of the contract value. The amount of initial margin required is different for different commodity. It also depends on the exchange that you will be trading on.

This is an example:

Assume that you are trading in MCX futures contract worth Rs 25,000. In this case, you need to deposit a margin of Rs 1250. That is, 5% of Rs.25000, before you are entering in to trade. The margin needed for the commodity you are trading in is 5% on your exchange.

Maintenance margin in MCX

If your trades are gone to loss and your balance is reduced to a limit then the broker helps to increase your fund to balance your account. The limited approach is called the maintenance margin.

If you make consistent profit from trading, you can increase your account balances. In this way, you can overcome your margin requirement and if you like, you can withdraw some excess amount from your account as well.

Assume that exchange that you will be trading on requires a maintenance margin of 6% for the commodity in which you are trading. So you have to maintain a minimum balance of Rs 1500 that is i.e. 6% of Rs 25,000 at all times. Now, assume that you lose money on your investment and your account balance falls to Rs 1480. That is, below the maintenance margin of Rs 1500,   because of the continuous lose your broker will inform you to refill the amount then you have to add money to your account for further trading.

NSE margin

In case of NSE stocks there is unpredictability in case of the price fluctuation. This price fluctuation leads the risk of stock.

Assume that an investor, purchases 100 shares of SBI (State Bank of India) at Rs.200/- on December 1, 2017. Trader should give the amount of Rs.20000/- (100 x 200) to his broker up to date, 2017. Broker, in turn, has to give this money to stock exchange on December 3, 2017. Sometimes the traders not give the proper amount at correct time to the broker.

Investor should pay initial margin to the exchange. it is the primary amount that must have to pay by the investor with his own cash or securities. This is set by the exchange for futures contracts. This initial margin requirement is depending up on the segment that we selected for trade.

If you wish to open margin account you have to apply through online, in this you have request margin trading privileges under the Additional Account Services section. After the approval you have to deposit money according to their terms and conditions for the stocks and securities. Margin call is demand that placed by broker on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls take place when the account value deflates to a value calculated by the broker.

Margin call is issued by the broker via a notification in phone or emails once a futures trading account going to below the maintenance margin requirement. And don’t be panic for Margin calls and shouldn’t be feared. It is just a remainder from the broker that that you have extended your account beyond risk.

How to calculate profit margin?

Step 1:- Find the cost of goods sold. For example, 100 Rupees.

Step 2:- Find out revenue (the price at which you sell the goods, for example 300 Rupees).

Step 3:- Subtract cost from revenue to calculate the gross profit. 300 – 100 = 200 Rupees.

Step 4:- Divide gross profit by revenue: 200 / 300 = 0.6

Step 5:- convert it into percentages: 0.6* 100 = 60%.

This is method is used for margin calculation.

These are main methods to avoid the margin calls both in MCX and NSE

1) Add funds,

2) Adjust positions

3) Liquidate some or all of the trades in the account.

The fund adding is in a beneficial way is to reduce the marginal call. If it causes any loss then we have to exit in correct time it may save your fund from huge loss. Most will agree that depositing funds on short notice is the least proper action. Each margin call is triggered and after that we will take action for it is a foolishness each condition should be carried out in an efficient way to balance or risk and reward. One of the most mentally challenging aspects of trading is watching the market moves according to the manner that are expected after trade has been liquidated. The anticipation and emotional doings are not good for a professional trader. The main term you have to stick on your mind is that the fund utilization. If you have no idea about the utilization of fund it must be very badly affected your trading carrier. If you really wanted to reach in a peak so utilize your money and time efficiently.

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