As per the Securities and Exchange Board of India (SEBI) guidelines, brokers are required to periodically provide various types of trading and account-related details to their clients. One such detail is the Daily margin statement.
Let us first understand what margin is, and then we will look at the daily margin statement and how to interpret it in detail.
What is margin?
Did you know that it is quite common for traders to use leverage while trading in the cash segment? Trades can do so with the help of margin facilities provided by brokers. Margin is a form of security that brokers keep when a client wants to take a leveraged position.
For example, stock A has a margin requirement of 25%, meaning that if a trader wants to take a cash position of ₹1,00,000, they only need to deposit ₹25,000.
Based on volatility, liquidity, and various other factors, exchanges decide the margin requirements for each stock. Margin requirements for a trader may also vary according to existing margin positions in their account.
Now, a question that traders ask is that if I can take a margin position, why should I take delivery of a stock by paying the full price? Brokers charge interest on the excess funds provided for trading.
In the example above, interest will be charged on the extra ₹75,000 provided by the broker as leverage. Due to stock price changes, daily margin requirements also change. If a trader fails to maintain the minimum margin required, they can be forced to sell the securities or may be penalized.
Also read: Margin Trading
What is the daily margin statement?
A daily margin statement is issued by brokers to clients that contain information regarding their margins. It contains data such as margin requirements for open positions held by the clients, margin available to take new positions, margin shortfalls that the client needs to fulfill to avoid penalties, etc. Let us look at the daily margin statement in detail.
Segment: This column specifies the segment. Equity, Futures and Options, Currency derivatives segment, Commodities, Securities lending and borrowing, etc.
Trade day: The day a trade is placed in any of the given segments.
Margins available till T-day column consists of six sub-columns. Let us look at these in detail:
- Funds: As suggested by the name, this column depicts the Funds available for trading and investment
- Value of securities (after haircut): When you sell your shares, it takes T+1 to settle your account. But as soon as you sell the shares, you receive margin benefits on these stocks. Brokers keep a percentage of this value to account for volatility or risk until settlement, and the rest is available to you for trading.
- Value of margin pledge securities (after haircut): As a trader, you pledge your securities as collateral for margin requirements. Brokers deduct a small percentage of this value to account for volatility, and the rest is used as a margin. The remaining value, after the small deduction, is the value of margin pledge securities (after haircut).
- Bank guarantees / FDR: Any financial guarantee issued by the bank or a Fixed deposit as collateral is displayed in this column.
- Any other approved form of margin: Government securities like Treasury bills, bonds, etc, and other approved securities in demat form can be used as collateral for fulfilling the margin requirements.
- Total margin available: Sum of all the sub-columns in the Margins available till T day column.
The next column is Margin/ Consolidated Crystallized Obligation / MTM required by Exchange/CC end of T & T+1 day respectively, and it has four sub-columns:
- Total upfront margin: This column depicts the total amount blocked for trades that are still open.
- Consolidated Crystallized Obligation / MTM: This column shows the extra margin collected based on daily changes in the value of the margin, after collecting the upfront margin.
- Delivery margin: Margin required for the settlement of trades that result in physical or actual delivery of assets. This column shows the delivery margin deducted after collecting upfront and CCO/MTM.
- Total requirement: Sum of all the sub-columns.
Excess / Shortfall w.r.t. Requirement by Exchange / CC: This column shows whether there is an excess or a shortfall compared to the margin required. If there is a shortfall, a penalty can be levied.
Additional Margin required by member as per RMS: A broker can block extra margin for a client if they think that there is more risk.
Margin Status (Balance with Member /Due from the client): This is the final margin balance available or due from the client. It is obtained by subtracting the Excess/ shortfall column from the additional margin required column.
Also read: Understanding asset valuation: A comprehensive guide
Bottomline
Through this article, you can get a clear picture of what a margin is and how to read a daily margin statement. Brokers are required by the SEBI to send a daily margin report to their clients. Most brokers send it by email nowadays. You can ask your broker to send this statement in physical or digital format if you have not received the same.
Always remember that margin trading is a double-edged sword. It can exponentially increase your gains and risk. Margin should be used with a lot of caution. A shortfall of margin can lead to penalties.
Also read: Key risks in investing in the stock market
FAQs
1: What is a daily margin statement?
A daily margin statement is issued by brokers to their clients, and it contains information regarding the margin. This statement shows how much margin is required, how much margin is available with the traders, and whether there is a surplus or deficit in the margin.
2: What is the reason for the charging margin?
When a leveraged position is taken, brokers charge a certain margin from the clients. This is done so that if the position shows unfavorable movement and a client’s face gets wiped out, the broker will not have to pay from their pocket. The margin requirement is preset for each stock.
3: Is margin trading risky?
Margin trading amplifies the risk as well as the reward. Margin trading means using leverage. Suppose the margin requirement for a stock is 10%. You can take a ₹10,00,000 position by depositing ₹1,00,000 as a margin. This multiplies your risk and reward by a factor of 10.
4: Will I receive a daily margin statement every day?
Yes, margin requirements fluctuate daily due to the changes in the prices of an underlying stock or any position. Due to this, the broker sends a margin statement every day to the client informing about the margin requirements so that the client can provide the required margin in case of a shortfall to avoid penalty.
5: Do Indian brokers provide margin facility?
This facility can vary from broker to broker. Some brokers provide margin for intraday only, and some brokers provide overnight margin facility and they charge interest for the excess amount provided as leverage.
