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Margin is a significant part of the fast-paced world of trading. They are a trader’s “good faith deposit,” which the broker needs to open positions. To keep traders from losing too much money, margins make sure they have enough cash on hand to cover any losses that may occur.
Some traders don’t have enough available margin in their account compared to what the exchange or broker needs. This is called a margin shortfall. This can happen for many reasons. Traders need to know about margin shortfall because it can cause penalties or even the closing of positions.
This article will explore various such instances causing margin shortfalls to help you make informed decisions.
What is the margin shortfall?
For traders, a margin shortfall happens when the available margin in their account is less than what the exchange or broker needs. This could be because of many issues.
Different types of trades need different amounts of margin, which is set by the Securities and Exchange Board of India (SEBI). These margins are worked out by looking at how risky the trade is.
The needed margin must be met with funds or collateral that can be used as a margin. There is a shortfall in the margin limit if this is not done.
For example, let’s say a trader has put up some securities as collateral to get a margin. The trader’s available margin goes down if the market value of these securities drops a lot. This available margin must be greater than the required margin set by SEBI. If it is less, there is a margin shortfall.
Traders need to know how to deal with margin shortfalls because they can cause penalties or even the loss of positions.
Instances leading to margin shortfall
Stock ITM (In The Money) position under-delivery period
A margin shortfall can happen if a trader has an “In The Money” (ITM) position during the delivery period but not enough margin to cover it.
Unhedge the portfolio
When you don’t hedge your portfolio, the risk goes up. A margin shortfall can happen if the market moves against your open positions and they don’t have enough margin to cover their losses.
Mark to market
Mark to Market, or MTM, is the process of revaluing securities based on how much they are worth on the market right now. Another problem that can happen is that the trader might not have enough margin to cover the drop in the value of the securities because of the MTM, leading to margin shortfall.
Equity Intraday trade is not squared off
It turns into a delivery trade if the trader doesn’t close out an intraday equity trade. Margins can fall short if the trader doesn’t have enough to cover the delivery trade.
F&O increase in margin requirement due to shuffling of positions
Changing positions in Futures and Options (F&O) trading can cause margin requirements to go up, as per the SEBI report on F&O. Margin shortfall can happen if the trader doesn’t have enough to cover the higher requirement.
Failure to maintain incremental physical delivery margins
A trader may not have enough margin if they don’t keep up with the required incremental physical delivery margins for their positions.
Impact of margin shortfall
A shortfall in margin can have a big effect on traders. A trader has a margin shortfall when their account doesn’t have enough money to meet the margin requirements. Many things could go wrong with this.
First, the trader might have to pay a margin shortfall penalty for not having enough margin. This is a fine that the exchange or broker gives to traders to make sure they keep the required margin in their accounts.
Second, traders can also be hit with a peak margin penalty now that there are rules about peak margin. Traders are hit with this fee if their available margin falls below the peak margin requirement at any point during the day.
In the context of trading on NSE, a margin safety penalty is imposed based on the number of instances a trader has experienced margin shortfall.
Bottomline
The penalties resulting from margin shortfalls not only increase the cost of trading but can also deplete a trader’s capital quickly.
If you want to trade successfully, you need to know and keep track of how much margin you need.
FAQs
Your account shows a margin shortfall when the available margin (funds or collateral) in your account is less than the margin required by the exchange or broker. This can occur due to various reasons such as market volatility, changes in margin requirements, or insufficient funds in your account. It’s important to monitor your account regularly and maintain sufficient balance to meet the margin requirements and avoid potential penalties.
A peak margin penalty is imposed when a trader’s available margin falls short of the peak margin requirement at any point during the day. For example, if a trader enters a position that requires ₹1,00,000 as peak margin, but only has ₹80,000 in their account, they would face a peak margin penalty on the shortfall of ₹20,000. The penalty rate varies and is determined by the exchange.
Margin debt refers to the money borrowed by an investor from their broker to buy securities. For example, if an investor wants to purchase 1000 shares of a company valued at ₹100 each, but only has ₹50,000, they can borrow the remaining ₹50,000 from their broker. This borrowed amount is the margin debt. The securities purchased act as collateral for this loan. It’s important to manage margin debt carefully to avoid potential risks.
In financial trading, margin refers to the money borrowed from a broker to purchase an investment. For example, if a trader wants to buy 100 shares of a company priced at ₹100 per share but only has ₹5,000, they can use a margin account to borrow the remaining ₹5,000 from their broker. This borrowed money is the margin. The purchased shares act as collateral for the loan. It’s crucial to manage the margin carefully to avoid potential risks.
To avoid a short-margin penalty, you need to ensure that your trading account always has sufficient funds to meet the margin requirements set by the exchange or broker. Regularly monitor your account, keep track of margin requirements, and add funds immediately if a shortfall is anticipated. Also, be mindful of market volatility and changes in margin requirements, as these can lead to unexpected shortfalls.