Margin Trading and Margin

Calculation
Chapter 2
Fundamentals of Investments
Alexander, Sharpe and Baily
PHI Publication, 3e
 Margin Account
• A cash account or Cash Segment is like a normal
savings account with a bank.
• Deposits (cash deposit and proceeds from sales of
securities) must cover the withdrawals (cash and
cost of purchase of securities)
• A Margin Account is like a savings account with an
over draft.
• If more money is needed than there is in the
account, a loan (subject to a limit) is made
available by the broker
 Margin Account Cont..
• Customer signs a hypothecation agreement, this
allows broker to use the securities as collateral for
bank loans, lend the securities to others who wish
to sell “short”, and can be sold to limit the losses
• While traded through Margin Account, security is
kept in a ‘pool’ also called “street name” or “DP
account”, so that they can be sold and transferred
without the customers permission
• While in the pool, customer is given dividend and
voting rights as a regular owner of security
 Margin Purchase
• Margin Purchase
– Cash Purchase and Margin Purchase difference
• Debit Balance
– The amount borrowed from the broker is called
the debit balance
• Call Money Rate
– The interest paid on the borrowed amount is
called broker's call money rate, which can be
different for different investors
• T+2 – after two days shares are credited in my demat
account.
• Margin trading – shares remain with broker as collateral(?)
• Share – Indigo – Rs 1000 per share, I purchased 50 shares
(50,000), EOD price falls 970 (Rs 30 loss) 50*30 = 1500 loss
• Broker will sell the shares at 970*50 = 48500 (brokerage
and other charges – STT, Stamp Duty, GST, Cess, SEBI)
• 10,000 (equity) + 40,000 (Debt) (broker may charge interest
on this)
• 2 paisa (every Rs100 – Intraday) , 20 paisa for every Rs 100
- delivery (traditional brokers – offline broker)
 Margin Trading
• Initial Margin Requirement
• Maintenance Margin
• Marking to Market
• Margin Call
– Under-margined, Over-margined (unrestricted),
restricted
• I bought 1 lot of Nifty at 10550 , lot size 75
• Trade value is 7,91,250 (10550*75)
• Initial Margin is 10% of trade value (79,125)
– Broker will give you a loan of 90% = 7,12,125
• Maintenance Margin is 7% of trade value (55,390)
• Price goes to 10200 loss 10000 (100 points per Nifty, 75 nifty in
one lot) now my account is 54000 (79125-7500) -> every day, at
the end of the day
• Margin Call: Your account balance is less than the required
margin. 1) deposit 25,125 OR 2) broker will sell nifty on my behalf
(79125 – 54000 = 25,125).
• Sell your position. 10200 *75 = 7,65,000 -7,12,125 = 52,875
• 52875
• Square off ? Closing your position Buy -> sell, Sell -> Buy
• Marking to Market
 Example 1
• A person buys 100 Shares of Delta Ltd on
margin for Rs 50 per share, with an initial
margin requirement of 60%. Assume that
maintenance margin requirement is 30%.
What actions will be taken if the price of the
stock goes to i) Rs 25, ii) Rs 45, and iii) Rs 60
 Solution
• Step 1:
– Find loan amount, using initial margin data
• Step 2:
– Find Under-Margin limit and Over-Margin limit
• Step 3:
– Do the remaining calculation
 Solution Cont..
• Step 1:
– Value of the trade
100 shares X Rs 50 per share = Rs 5000
All these shares are kept as collateral with the
broker for the loan that we are taking
– Initial Margin is 60%, so we have to pay
60% X 5000= Rs 3000
in cash, while we can take a loan of (5000-3000)
Rs 2000 from the broker.
 Solution Cont…
• Step 2:
Under-margin limit:

Over-Margin Limit:
 Solution Cont…
• Step 3:
– i) Price is Rs 25, the value of collateral will be
100 shares X Rs 25 per share = Rs 2500
Is it crossing any limits?
– ii) Price is Rs 45, the value of collateral will be
100 shares X Rs 45 per share = Rs 4500
Is it crossing any limits?
– iii) Price is Rs 60, the value of collateral will be
100 shares X Rs 60 = Rs 6000
Is it crossing any limits?
 Self study problems
• Mr Parmar buys on margin 1,000 shares of IFCI at Rs 25 per
share. The initial margin requirement is 50% and
maintenance margin requirement is 30%. What actions will
take place if price goes to Rs20,Rs23 and Rs28?
• Mr. Shah opened a margin account at a local stock broking
firm. Mr Shah’s initial investment was to purchase 200
shares of Biocon on margin at Rs 300 per share. Shah
borrowed Rs 22,500 from broker to complete the purchase.
– At the time of the purchase what was the collateral in Shah’s
account?
– If Biocon share rises to Rs 320, what will be the collateral in the
account?
– If Maintenance margin requirement is 35%, at what price Shah
will receive a margin call?
 Short Sell
• Mr A owns 100 shares of XYZ Ltd in the broker’s
account. Mr B places a short-sell order of XYZ Ltd.
• Broker will take these 100 shares from Mr A’s
account and sell them on behalf of Mr B. Proceed
of the sale will be kept by broker as a collateral.
• At a later date, Mr B will buy 100 shares. The
broker will transfer them to original account of Mr
A.
 The process is similar
• Minimum Collateral required = Loan X (1+
Maintenance Margin Requirement)

• Minimum Collateral Required = Loan X (1+

Initial Margin Requirement)
 Example
• Mr A sold 100 shares of XYZ Ltd at a price of Rs
100 per share on margin. Initial Margin required is
60% and maintenance margin is 30%. What will
happen if the share price goes to i) Rs 90, ii) Rs
105 and iii)Rs 130?
• Solution:
– Find out asset with the broker (sale proceed + IM)
– Find out Under and Over Margins at given price levels
– Take the actions
 Solution
• Under and Over margin limits will be,
• At Rs 90
– (Rs 90 X 100 shares) X (1 + 0.30) = 11700
– (Rs 90 X 100 shares) X (1 +0. 60) = 14400
• At Rs 105,
– (105 X 100) X (1 + 0.30) =13650
– (105 X 100) X (1 + 0.60) = 16800
• At Rs 130,
– (130 X 100) X (1 + 0.30)=16900
– (130 X 100) X (1 + 0.60)=20800
 Self Study
• Through a margin account, Mr X short sells
200 shares of M Ltd for Rs 50 per share. Initial
Margin required is 45% and maintenance
margin required is 25%.
– If the stock rises to Rs 58, falls to Rs 42, what
actions will the broker take?
 Marking to Market
• Mr. Shah opened a margin account at a local stock
broking firm. Mr Shah’s initial investment was to
purchase 200 shares of Biocon on margin at Rs
300 per share. Shah borrowed Rs 22,500 from
broker to complete the purchase. Maintenance
margin requirement is 35%.The stock movement
is as under:
• Day 0 closing 301
• 305, 309, 312, 308, 300, 292, 285, 290
 GTU December 2011
Mr. Rakesh Zhunzhunwala purchases 500 shares of
Unitech Ltd. at a price of Rs.35. He deposits Rs.7000 to
execute this trade. Ignore brokerage cost and taxes.
(a) Find out Initial Margin in percentage. Ans. 40%
(b) Suppose Broker has asked him for maintenance
margin of 25%. Find out Price below which the
maintenance margin call has to be given. Ans . Rs 29.75
(c) Suppose Price falls to Rs.25, how much amount
should be deposited by him as a part of maintenance
margin call? Ans. Rs 5000 (all the amount that I have
lost)
• Long position – Buy first then you sell
• Short Position – Sell first, then you buy
– In cash market, short position has to be squared
off intraday
– Square off – you complete your transaction (if Buy
– then sell, if sell – then buy)
• 7000/17500 = 0.4, 40%
• Loan is 10,500 (60%)
• 7000 - ? = 4375 balance (maintenance margin, 25%)
• ? = 2625 total loss for 500 shares
• How much is the loss per share?
• 2625/500 = 5.25 per share loss
• 35 – 5.25 = 29.75 – below this price Mr Rakesh will get a
margin call
• Price has fallen to Rs 25. Loss is (35 – 25) Rs 10 per share *
500 = total loss is 5000. What is the balance in my account?
Rs. 2000, if I get a margin call, I will have to deposit 2375 rs.
• (5000 + 2000) = 7000