Margin trading is the practice of buying stock with money borrowed from the broker. In which, investors make a cash down payment (called the margin) with the broker. The broker charges interest on this loan (in addition to the commission on each buy/sell trade) and the investor has to keep the entire stockholding with the broker as collateral. Investor has to put up additional cash in case the value of the stockholding falls below a certain amount.
There are three types of margin
- Initial Margin
- Variation Margin
- Maintenance Margin
Initial Margin:-It pertains to the amount of margin to be maintained from the beginning of the contract. This margin depends upon contract size or the lot size.
Variation Margin: Variation margin refers to the gain or loss made over days trading on the future contract and the corresponding gain or loss is subsequently added or deduced from the initial margin.
Maintenance Margin: It is the minimum margin required to be maintained by the investor with his broker depending upon the variation margin. If the balance in the margin A/C falls below the maintenance margin difference between the balance of current margin A/C and Initial margin is to be deposited by the investor with the broker.
In case when the balance falls below the maintenance margin the investors get a call or alert from the broker and it is termed as margin call.