What Happens When You Can’t Maintain Margin Money?
According to the rules of margin trading, an investor can purchase shares by paying only a percentage of the total purchase price, while the remaining amount is funded by the broker. The amount that is paid upfront by a trader is known as margin money. The margin system, while allowing for greater leverage, also comes with liabilities, which include the obligation to maintain margin money throughout the trade.
These limits can then trigger a number of situations. Understanding how these things work will help traders manage their positions effectively, thus avoiding the undesired outcome.
Understanding Margin Money in an MTF
The amount of margin money is the investor’s contribution to a leveraged trade, which can be in cash or the form of approved securities. In an MTF, the controlling broker funds the balance of the trade and charges interest on the amount so borrowed. The amounts for margin requirements are based on stock volatility, regulations, and the internal risk policies adopted by the broker.
After the execution of the trade, the margin shall be maintained at the stipulated levels throughout the trade. In case of a fall in price, the position loses value, and consequently, the margin requirement increases concomitantly.
What Changes A Margin Shortfall?
A margin shortfall arises when the equity amount in the trading account drops below the prescribed minimum margin. Such a scenario can arise if:
The price of the security on which MTF is raised goes down.
Any change in the broker’s margin policy?
The valuation of pledged securities goes down.
Increase in exposure or other MTF orders without adequate funding to cover them.
When the margin shortfall is made known by the above factors, the broker typically sends a notification to the investor stating that there is a margin shortfall and requiring that it be made up by bringing in additional funds or alternative collateral.
What Happens If I Fail To Maintain Margin Money?
Margin Call
The first step in the process is a margin call. The broker will request the trader to inject additional funds or pledge securities to restore the margin to acceptable levels. The notification is done via email, SMS, or the broker’s platform.
Action Time
Brokers usually give one or two trading days to the trader to take action on the margin shortfall. If it is still not rectified, the broker may take other measures to protect their exposure.
The broker could Square Off the Position.
Should margin money not be maintained with no rectification undertaken, the broker is entitled to liquidate all or part of the position without prior notice in recovery of the borrowed funds and to mitigate the risks of further losses.
For example, if an investor bought shares amounting to ₹1,00,000 under MTF versus ₹25,000 margin money and the value of the stock falls by 10%, the broker may demand that an extra amount be deposited in order to cover that margin shortfall. Should the investor fail to pay the additional amount, the broker may sell part of the shares to repair the margin ratio.
Interest under daily and other charges is Bullish.
In addition to interest accruing on the borrowed amount daily pending liquidation of the position, this only serves to further increase the cost of holding the trade, thereby progressively eroding the net worth of the position.
Impact on Following Trading Activity
Persistently failing to maintain margin money or respond to margin calls would, in turn, affect the trader’s credibility with the broker. Some brokers may bring down the margin funding limit, suspend access to MTF, or enforce stricter collateral rules.
Preventive Measures
Keep Track of Your Account: Ensure the trader is using broker dashboards or trading apps that permit easy tracking of margin utilization and account balance.
Set Alerts and Notifications: Some brokers send in real-time alerts to assess changes in the margin and possible shortfalls.
Avoid Over-Leverage: Trading with margin should be closer to the maximum allowed so that the margin gets the benefit of the cushion provided by price fluctuation.
Strategically Use Pledged Securities: Approved securities can meet margin money requirements without an immediate cash outflow.
Conclusion
Under MTF trading, keeping a check on margin money is an ongoing assignment. A shortfall can lead to margin calls, forced liquidation, increased costs, and thus, much trading is kept live under attentiveness on the part of investors. A well-informed trader must also know the funding requirements and act immediately when equity falls below acceptable levels. A disciplined approach to margin management is fundamental to the continuity of leveraged trades.
