Buying and selling underlying securities in the financial markets involves paying and receiving money from your trading account. But what if you don’t have sufficient funds at that moment and you want to buy or sell a particular security right now.
If you have a trading account with a registered broker, you can get the leverage of margins to buy or sell securities with a value higher than the money you have in your trading account. This is known as margins offered by the brokers and permitted by the exchange that provides a high leverage facility to traders and investors.
Topics Covered :
- What is Margin & How Margin is calculated in Trading?
- What is Margin Calculator in Stock Market or Trading?
- Different Types of Margin Calculators
- How to Use a Margin Calculator?
- Role of Margin Calculator in Trading
- Margin Calculators in Risk Management
- Summing up
What is Margin & How Margin is calculated in Trading?
Margin is a portion of money your broker allows you to use for intraday trading, short-term trading or in future & option trading. The margins are decided by the exchange while considering various factors like volatility in the price of the underlying security and credibility of the traders. The margins keep changing on a daily basis, as per the movement in the security price.
The exchange keeps changing the margin limits and keeps sending circulars to brokers on different stocks and indices. However, brokers can fix the margin higher if they observe high risk in the security, but they cannot have the margin below the margin set by the exchange.
To understand how margins are calculated, let’s take an example. If your broker is giving you 20% margin on a particular stock of XYZ company with a market price of Rs 200, and if you want to buy 5 shares, then the amount required to buy the shares of this XYZ company is Rs 1000.
Here, as your broker is offering you 20% margin, means you can buy 5 shares of this company by only paying Rs 200, the remaining Rs 800 is like a loan offered by your broker to you, that you can pay at the time of the settlement of shares into you demat account. In order to calculate the margins on various underlying securities, you can use margin calculator.
What is Margin Calculator in Stock Market or Trading?
Margin calculator is a type of virtual device or online application to calculate the margin allowed by the brokers to their customers (traders) for trading in the stock market. This margin calculator is equipped with the predefined percentage of margin allowed for different types of underlying securities for different types of trade positions.
You can use the margin calculator offered by many brokers and financial companies freely available to calculate the margins on equity intraday trading, option buying or selling. However, it is highly recommended to use the margin calculator offered by your broker as there could be differences in margins from broker to broker and types of margin calculators.
Different Types of Margin Calculators
The types of margin calculators depend on the types of margins allowed by the brokers. As the calculation of margins is based on the types of margins you are looking to avail while putting the trade orders. Hence you should know the types of margins, the margin calculator calculates.
SPAN Margin:
SPAN, which stands for Standardized Portfolio Analysis of Risk, is the most commonly used basic type calculator used to calculate the margin for the trades in the Future & Option (F&O) segment. The SPAN margin measures or calculates the maximum loss that can occur in a portfolio under different market conditions. This SPAN margin is revised up to six times a day depending on the change in the margin value while using the margin calculator.
The Exposure Margin:
This exposure margin is an extra margin collected by brokers to protect their liability if there is an unexpected adverse market condition.
Value at Risk (VaR) Margin:
VaR or value at risk margin calculates the possibility of loss in the value of underlying security based on the statistical analysis that includes historical price movements and the volatility level of the underlying security.
Extreme Loss Margin:
The extreme loss margin is used to calculate the losses that might arise beyond the VaR margins. This type of margin is considered the higher of the two values, either 5% of the value of the trade position of the underlying security or 1.5 times the standard deviation of the daily logarithmic return of the price of the underlying security traded in the past six months.
How to Use a Margin Calculator?
To use the margin calculator you have to visit the website of your broker and find the section providing the margin calculator online. Here you have to select the type of security or asset, like equity, commodity, currency future or options.
You also need to select the exchange and then the name of the symbol of the underlying security in the required field of the margin calculator. Now you have to choose the quantity and finally pick between the buy and sell type of order you want to execute.
The margin calculator will show you the margin required to trade in this particular security with the specified quantity. The price of the underlying security will automatically be taken by the calculator from the exchange you have selected. Margin calculators is playing a significant role in trading by providing the leverage to traders beyond their fund’s availability.
Recommended Read: How to Calculate Margin Trading Interest
Role of Margin Calculator in Trading
Margin calculator plays a significant role in trading providing the details of margin required to trade in various underlying securities. It allows the traders to take a position in trade higher than the funds available to them at that point in time. This margin facility helps to boost the rate of returns or make higher profits in a short span of time.
The margin calculator not only helps to calculate the margin required to trade in particular security but also limits your losses if the market or underlying security moves against your expectations. As the margin is calculated on the entire value of your position, hence it is helping you to manage your risk in highly volatile market conditions.
Margin Calculators in Risk Management
Apart from cash market trading, margin calculator also plays a big role in high-risk markets like options trading. Owing to high volatility and other factors trading in the options is riskier, but with the help of a margin calculator, you can determine the potential loss, you can incur and according to that, you can adjust your trade positions.
Suppose you have calculated the margin in your option trade, if potential loss is more than your risk tolerance, then you can modify or adjust you trade position by picking the other underlying security, selecting a different strike price or avoiding trading in such securities. It will help you to avoid losses and manage the risk from such losses.
Margin calculators keep telling you the margin required to maintain as per the market volatility and movement in the price of the underlying security. In low-risk trades, you can enjoy high margins, while in high-risk trades, the margins are reduced to minimize the impact of risk. Hence, it also allows you to choose between the high-risk and low-risk trades.
Summing up
Margin calculators in trading or the stock market is that instrument, providing details of the margin required in different types of trades in various underlying securities. There are four types of margins in trading – SPAN, Exposure, VaR and Extreme Loss Margin calculated on margin calculators. And to calculate the margin you have to fill all the required details.
Margin calculation not only provides extra leverage to traders enter into the trade position beyond the funds available to trade at that point in time. It plays a significant role in earning higher returns, with fewer amounts of funds invested and getting the returns on the actual amount invested by them at the time of trades.
Finally in high-risk trades like options, margin calculators are playing a significant role of identifying the level of risk allowing the traders to align their trade positions accordingly. Hence, calculate your margin accurately and enjoy the power of leveraging for better returns.
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