How to calculate the minimum margin?

Last Updated: 1 Jul 2022

Generally, investors include margin trading into their stock market trading style as it may result in higher profits by purchasing more stocks. Margin trading is when you borrow money from your stockbroker to buy more stocks. It is like a loan to buy/invest in more stocks which you have to repay with interest to your stockbroker at a specific period, and the stocks are held as collateral. However, as the stock market is volatile, purchased shares can go down in value, making it impossible for the investor to repay the borrowed margin. To protect the investor’s interests, stockbrokers demand to hold a minimum margin in their margin account.

What is the minimum margin?

The minimum margin or maintenance margin is the number of stocks investors must maintain in their margin account. For example, suppose you bought 1,000 shares of a company at Rs 10, and the maintenance margin is 30%. If the initial margin (explained below) is 50%, the investor has to pay Rs 5,000 upfront, and the rest of the 5,000 is provided by the stockbroker.

As the maintenance margin is 30%, the investor needs to hold Rs 3,000 (30% of 10,000) in the margin account. If the price drops to Rs 5, the investor would have less than Rs 3,000 worth of shares. In this case, the stockbroker will use a margin call where the investor has to deposit enough money to make the balance 30%.

How to calculate the minimum margin?

Here is how you can calculate the minimum margin:

Step 1: Log in to your margin account and calculate the value of all the shares you have. For example, suppose you hold 1000 shares of Rs. 10 each and 500 shares of Rs. 15 each. The total value would be Rs 10,000 and Rs 4,500.

Step 2: Look at the total margin loan balance (the amount you have to repay). Suppose it is Rs 5,000.

Step 3: Now, consult your stockbroker and ask about the minimum margin percentage. Suppose it is 30%.

Step 4: Now add the total value of your shares (Rs 10,000 + Rs 4,500), ie. Rs 14,500 and find the 30% of the value, i.e Rs 4,350. This is the minimum margin value you must have in your account as equities.

Step 5: Now subtract the total margin loan amount from the value of your investments, i.e., Rs 14,500-Rs 5,000= Rs 9,500. This is your total equity.

Step 6: Check if the equity amount is greater than the minimum margin amount. As Rs 9,500 is higher than Rs 4,350, you have an adequate margin in your account. If not, you will get a margin call to deposit the remaining balance.

Considering the above example, if the stock you have purchased appreciates, you can realize significant profits even after repaying the margin account to your stockbroker. However, it is wise to consult and open a comprehensive margin account with an experienced stockbroker such as IIFL before you calculate the minimum margin.

Frequently Asked Questions

What is the initial margin and minimum margin?

The Initial margin is the amount an investor must pay to purchase the stocks. Minimum margin is the amount of equity an investor must maintain in their margin account after making the purchase.

How does change in volatility affect margins?

The stockbrokers may increase margin requirements if the stock indicates volatility. It is because the stockbroker thinks that the stock price may go down in the near future.

What are the types of margins levied in the cash market segment?

The various types of margin include:

• VaR Margin
• ELM Margin
• Span Margin
• Market to market Margin
• Exposure Margin