Types of Margin Money

Margin money is often used in the context of derivatives or commodities market. Margin money is taken by stock exchanges or regulator from traders in order to ensure that in the event of loss to trader, the stock exchange does not incur loss. There are different types of margin which are taken by stock exchanges, let’s look at some of them –

1. Initial Margin – Initial margin is taken by the stock exchanges from traders in order to cover the largest potential loss which can happen in one day. Both buyer and seller have to deposit the initial margins. The initial margin is deposited before the day opens and also before the traders takes the position in the market. Based on the volatility of underlying the initial margin can be between 5 to 20 percent.

2. Mark-to-market margin – All losses of the trader must be met by the trader by depositing further collateral known as mark to market margin in to the stock exchange, and any profit is credited to the account of trader at the end of trading day.

3. Additional margin – In case of sudden higher than expected volatility, additional margin may be called for by the stock exchange. This is generally imposed by the stock exchanges when the markets have become too volatile as was the case in year 2008 when Lehman brother collapse happened.

4. Maintenance margin – Some exchanges work on the system of maintenance margin, which is set at a level slightly less than initial margin. The margin is required to be replenished to the level of initial margin, only if the margin level drops below the maintenance margin limit. For example If Initial Margin is fixed at 100 and Maintenance margin is at 85, then the trader is allowed to trade only until the maintenance margin is above 85. If it drops below 85 to 65, then a margin of 35 is to be paid so that initial margin again becomes 100.

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