Margin calculator for stock trading: How to use it effectively?

In this article, we will discuss

1. What is Margin?
2. What is a margin calculator?
3. How are Margins calculated?
4. Check Our Video on Span Margin Calculator
5. What is SPAN margin?
6. What is exposure margin?
7. How margin calculator can be used effectively
8. How to use a margin calculator?

Margin calculators are an incredibly useful tool that helps in calculating the amount that must be deposited as a margin with the stockbroker. Every stock broker collects a certain margin from traders before initiating a trade in the NSE equity derivatives/MCX/NSE Currency derivatives segments. As per the latest exchange circular, it is mandatory to collect the SPAN margin, exposure margin, and net buy premium margin at the time of placing a derivative trade by the stockbroker. In this article, we will cover how investors can use a Margin calculator effectively. We will cover the below points:

What is Margin?

Margin is an amount that a trader has to deposit with the stock broker before buying or selling derivatives like Futures & Options (F&O).The margin acts as a security deposit and helps to prevent counter-party risk in case of default. This is similar to the money that needs to be deposited with the landlord before we rent a property so that in case the tenant defaults in payment, it can be deducted from the deposit amount. Margins are required to be paid by both the Long and short-position holders. The margins are different from profit or loss. Margins are fixed by exchanges in order to safeguard stockbrokers when traders experience losses.

What is a margin calculator?

A margin calculator is an online tool that calculates the margin required for a particular trade, taking into account several factors such as time, price, and volatility. Higher the volatility, the higher the margins. required. Also, the higher the probability of incurring a loss, the higher is the margins. As per the latest exchange circular, it is mandatory to collect the SPAN margin, exposure margin, and net buy premium margin at the time of placing a derivative trade by the stockbroker. Check Our Samco's Margin Calculator 

How are Margins calculated?

Initial margin = SPAN + Exposure margin While the SPAN margin is the minimum amount blocked when entering into an F&O position as per the calculation, exposure margins are money blocked over and above the SPAN margin to cover for any potential ATM (at-the-money) losses.

Check Our Video on Span Margin Calculator

What is SPAN margin?

SPAN margin is the minimum margin that is required to be collected by the stock broker when traders enter into a derivative contract. This margin is determined by exchanges. The span margin is variable, meaning it fluctuates throughout the day depending upon the volatility in the underlying contract. SPAN is a calculation developed by Chicago Mercantile Exchange (CME) and is used to calculate margins for derivative trades. SPAN uses scenario-based approach to arrive at adequate margins. It generates about 16 different scenarios and for each of these scenarios, a possible loss that the portfolio would suffer is calculated. The maximum loss that the portfolio would suffer in any of the scenarios considered in one trading day would be the initial margin required to be paid. SPAN calculation logic is not disclosed publicly & it is a tough calculation. SPAN margin is monitored and is revised 6 times in a day. When the volatility in the position increases during the day, the stockbroker would call upon the trader to increase his margin. Similarly, when the volatility decreases the stock broker may release some of the margin blocked earlier. Investors can easily calculate SPAN margin at Samco app or website free of cost.

What is exposure margin?

In addition to the SPAN margin, exposure margin is also collected by the stock broker to cover any additional risks that may arise due to erratic swings in the market or any Black Swan Event. This amount is decided by the stock broker. Unlike SPAN margin, exposure margin does not fluctuate and is fixed at the below rate:

• For index futures and index option sell positions, it is 3% of the notional value.

For futures on individual stocks and sell positions in options on individual securities, it is higher of 5% or 1.5 standard deviation of the LN returns of the security over the last 6 months on the notional value of position.

How margin calculator can be used effectively

Margin calculator is one of the most important tools available free of cost with the trader. If used effectively, the trader can enjoy number of benefits as explained below:

• To save time –

By using a margin calculator, investors can calculate the margin requirement before initiating a transaction. Having this information on hand may be quite valuable. This may save traders valuable time. It also helps traders to plan their trades and set targets in a more informed manner.

• To avoid margin call –

The margin calculator helps the trader to know the margin that they need to maintain with their stockbroker. This also helps them to avoid margin call or penalties. According to SEBI Regulations, a margin shortfall penalty is levied if there are insufficient funds in the client’s trading account. A margin calculator may help in saving any additional cost associated with a trade.

• To pay a lower margin with a hedge position –

Since every trader or investor wishes to maximize his returns on the invested amount, trading on margin or taking leverage helps them to inflate their profits or losses. They can take bigger bets with a smaller capital by paying only the margin amount instead of the full trade value. Also since margins are calculated based upon volatility and the probability of loss for the entire portfolio, the margin requirement falls if the probability of loss goes down due to hedged positions. Hedged positions means taking an opposite position. Thus, margin calculator can be used to calculate the least amount of margin or capital required by taking hedged positions and thereby reducing the risk to the portfolio as well. For eg, a Long Position in Nifty requires a margin of Rs 1,25,000. The same margin can be reduced by taking a hedged position by selling a Call Option. Thus both the positions are opposite to each other in nature & reduces the margin requirement as the risk has reduced. Thus a trader can use a margin calculator to try and create various combination of position where the margin required and thus the risk is lowest and return on the capital employed is higher.

• To earn higher profits –

One can trade in increments of their initial margin deposit and margin calculator can be used to increase profit in F&O trade. Eg: If 1 lot of Nifty, lot size = 50, is bought at Rs. 17,644 then margin required would be Rs 99,974. Therefore, almost Rs 8.8 lac worth of Nifty could be bought by paying a margin of just Rs 99,974. Upon just 1% profit on nifty, a trader would essentially make profit of Rs 999.74 and not just Rs 176.44. This way profits can be increased. However, just as profits can multiply, losses can also multiply.

• To keep a check on volatility -

Margin also helps the investor understand the risk associated with the trade. The margins go up when the volatility in the stock price increases, this in itself is a warning bell to the trader to not overindulge and play with caution. It can also be used to determine the maximum quantity that might be lost if the transaction is unsuccessful.

• To determine feasibility of trade –

With the help of a margin calculator, trader knows the exact amount that they need to deposit as margin before entering a transaction. This information allows the trader to quickly take a decision on whether or not he can afford to make the trade.

• To plan trades more efficiently –

Knowing margin requirements beforehand allows traders to make informed decisions. Trader can make arrangement for funds beforehand to avoid selling at a loss due to insufficient fund balance and margin shortfalls.

How to use a margin calculator?

Enter the following details in Samco’s margin calculator:

• Select Segment - NFO, CDS, NCX or NCDEX
• Select Product Type - Futures or Options
• Select Underlying: e.g.: NIFTY, BANKNIFTY or any stock
• Select Net Quantity: Input the net quantity you want to trade
• Choose Between Buy or Sell

After entering these inputs, the total margin requirement as well as the SPAN margin and exposure margin will be shown. You will also be able to check out the individual margin values.

Conclusion

Margin calculators are accurate, fast, and convenient, and help traders to manage risks and make informed trading decisions. By using these tools and resources, traders can improve their trading performance and achieve their financial goals more easily. Samco provides Margin calculator to calculate the span margins required for trades made in the NSE - derivatives segment or NSE - currency derivatives segment. Samco also provides various resources that can help traders manage their risks and make informed trading decisions. Visit Samco‘s website today to learn more about its products and services. If you are planning to start your investment journey, open your free demat account with SAMCO.