Margin Requirements Definition and Percentage in India
Definition of Margin Requirements – Minimum level of securities or cash that an investor needs to maintain in his or her margin account.
For buying stock on margin or for doing trading on margin, it is mandatory to open up a margin account. For opening a margin account, one has to collateralise either cash or security. The margin trading is done either through bank or a brokerage firm. However, if seen practically, brokerage firms are more involved in Margin trading in India.
If investor fails to keep a maintenance margin, then broker sell the securities in the margin account. Well, in India there are two types of Margin requirements. These are explained in detail below.
Types of Margin Requirements
Initial Margin – It refers to the amount of equity that an investor has to keep in the margin account. This is done to avoid the risk of over – trading or wrong speculation. So, till the margin level remains equal or above the initial margin, an investor can do stock market transactions freely.
However, if any loss happens, the margin requirements also declines. The broker does a margin call to investor to refill the margin account to its original status. But when default happens, brokerage house has the right to sell the securities in margin account or even sue the investor.
Maintenance Margin – Minimum amount of balance that an investor needs to maintain at all times. It could be in the form of cash or stock. When the balance of the margin account declines, a margin call is made which provides a grace period to the investor to regain the status of his margin account. In case, the investor is not able to refill the account to the minimum level of maintenance margin, brokerage house can sell off the securities in order to obtain the previous position.
The margin requirements for the equity share is always higher than the other types of securities due to the higher risk. Keeping of maintenance margin protects both brokers as well as investors. Brokers has not to bear higher losses and investor did not loose everything.