Types of Margin

The stock exchange collects margins in various forms like Gross Exposure Margin, Special Margin, Daily/Initial Margin, Mark to Market Margin, Ad-hoc Margin and Volatility Margin. We understand some related terms hereunder:

Gross Exposure Margin: Gross Exposure margin is payable on a daily outstanding positions for each stock. The exchange requires the brokers to collect security in the form of cash or bank guarantee to safeguard against any default from the trader’s end for the positions taken on the given day.

Special Margin: In some cases, stocks may witness abnormal movements in its prices or volumes due to excessive speculation. In such cases, the exchange imposes a special margin of 25% to 50%. This is largely dependent on the variability of the movement of prices or volumes.

Daily / Initial Margin: At the end of each trading day, brokers collect a margin which is payable against the open positions of the traders either on the buy side or the sell side. These margins are basically collected in order to safeguard the positions against and circumstances that may occur in between the trading days. Incase of derivatives (futures and options), both the buyer and the seller are required to deposit the initial or daily margin before the opening of the day of Futures.

Mark to Market Margins: Mark to Market margin is the difference amount which the trader needs to pay when the market price of a particular stock falls below his transaction price incase of a buyer and rises above his transaction price incase of a seller. It is calculated on the difference in prices of a particular day’s closing and previous day closing and is applicable to the F&O segment.

Ad-hoc Margin: SEBI has prescribed that an Ad-hoc margin is imposed on the brokers with very large positions on an overall basis or in specific low priced stocks which are illiquid.