What is stock margin and future and options margin provided by broker. whats the use of margin. How margin differs for intaday and cover orders
Margin is the money deposited before one can trade in respective market. It varies depending on the risk of trade involved. Higher the risk higher the margin required. In other words, it is money collected in advance before a trade so that in case of loss in the trade, that loss can collected from the margin.
In cover order, there is compulsory stop loss that has to be kept, so chance of loss accumulating is less compared to ordinary intraday trade. So the margin requirement is less for cover order.
Here is a link that will help :
Assume you have 2500 rupees in your trading account.
If you buy 10 shares with each share costing around 250 rupees, then you need to pay 2500 rupees. That entire money is blocked from your trading account. Then this condition is said to be No leverage or 100% margin. You will not have any remaining balance in your account and you cannot do any other trading on some other stock since you dont have balance. Such a product is Cash and Carry, CNC or Holdings.
If you buy 10 shares with each share costing around 250 rupees, but only with 250 rupees (not 2500) blocked from your trading account. This is 10 times leverage. In other words margin is 10%. They only need 10% of your money to allow you to do this trading, Because they are sure, before end of day, you should sell/buy back the shares to close your deal, the maximum loss incurred by you may not cross the 10% money they have blocked. This type of trading is allowed as Intra Day or MIS trading. Leverage will vary as per stock and risk involved, say 3 times to 10 times.
If you buy 10 shares with each share costing around 250 rupees, but only with 125 rupees (not 2500) blocked from your trading account. This is 20 times leverage. In other words only 5% margin. They only need 5% of your money blocked, since they ensure you set a mandatory stop loss (usually 1.5% loss they will allow), so you will not end up in huge losses and by ensuring this they are giving more leverage and collecting less margin. Similar to MIS they will sell/buy back the shares and close your deal within the day. This type of trading is allowed with the help of Cover Orders. Leverage will vary as per stop loss and stock nature. Usually around 20 to 30 times or even less.
Margin is how much money the broker is blocking from your account, for you to do trading. For example you place an order, some money is blocked from your account as margin, So if you decide to cancel the order you placed before its execution, you can cancel it and the same amount of margin money will be returned back to your account.
For F&O margin requirements are different. Please read margin policies on zconnect to get good amount of idea on it.