Investing in the Indian stock market has always been fruitful to investors who have based their investments on extensive fundamental and technical research. However, even if you know a stock is fundamentally and technically sound, you will need an adequate capital amount to make good profits. It is a common issue with new or active investors that they do not have a high investment amount, either because of financial restraints or existing high-volume investments.
Stockbrokers provide a facility called margin, allowing investors to borrow money from them and use it to buy more securities than they could purchase with their own funds alone. With a higher investment amount, the chances of better returns also increase.
However, buying on margin requires every investor to have enough maintenance margin in their margin accounts. If you are looking to amplify your returns by buying on margin, read on to understand what is maintenance margin, and how you can ensure an adequate maintenance margin amount.
What is maintenance margin?
Maintenance margin is the minimum equity investors must hold in their margin account after purchasing securities on margin by taking a loan from the stockbroker. The maintenance margin amount is expressed as a percentage of the total market value of the equities held in the margin account.
The maintenance margin is different across stock exchanges such as NSE and BSE, and the Securities and Exchange Board of India (SEBI) regulates the maintenance margin percentage. Although SEBI has set guidelines on the maintenance margin, stockbrokers may require investors buying on margin to have a maintenance margin between 30% and 40%.
Read more: Margin trade financing
Breaking down maintenance margin
Stockbrokers provide the facility to investors to avail of a loan from them and buy more securities. Similar to a lender that provides you with a loan, stockbrokers also charge interest on the amount they provide as a margin. However, as the stock market is volatile, they utilise the equities you have as collateral.
When you take a loan from the stockbroker, you are required to put a portion of your equities into the margin account based on their current market value. A margin account is an account that investors can use to buy securities, including stocks, options, bonds, etc., with the money they borrow from the stockbroker.
The stockbrokers require the investors to have a minimum maintenance margin based on the amount of equities in the margin account. For example, if the maintenance margin requirement is 30% and you have Rs. 50,000 worth of equities in your margin account, you must maintain a minimum of Rs. 15,000 at all times in your margin account. It also stipulates that you can borrow the rest of the 70%, i.e., Rs. 35,000, to buy more securities after you have deposited Rs. 15,000 as maintenance margin.
If the value of your equities falls below the maintenance margin, the stockbroker will notify you with a margin call. Once you get a margin call, you must immediately deposit the deficient amount to maintain an adequate maintenance margin.
Read more: Margin calculator
Maintenance margin and margin accounts
When investors want to do margin trading, they must sign an agreement with the stockbroker stating they must maintain a minimum amount. The minimum amount, called the maintenance margin, is based on the total amount of equity in the margin account minus the amount that the investor borrows.
Hence, a margin account is an account that allows investors to borrow a certain percentage of the total value of the equities deposited in the margin account. On the other hand, a maintenance margin is the minimum amount investors must maintain in their margin accounts after they have borrowed funds and bought securities using the borrowed amount.
Stockbrokers regularly review the margin account to ensure that the total value of the equities has not fallen below the minimum margin amount. In case it falls below the maintenance margin, a margin call is notified. If the investors fail to deposit adequate funds after the margin call, the stockbrokers can sell the securities held in the margin account to fulfil the maintenance margin amount. The liquidation of equities in the margin account can happen without consulting the investors after failing to fulfil the margin call.
Read more: Intraday margin
Conclusion
The maintenance margin is the minimum amount that you must deposit in your margin account after you have borrowed funds from the stockbroker and used it to buy securities. Maintenance margin is important for the stockbrokers to ensure a safety buffer, mitigating the risk of lending money to investors. Once you use the borrowed funds to buy securities, it is crucial to maintain an adequate maintenance margin in your margin account at all times to avoid a margin call.
Maintaining an adequate margin is also important as it ensures you can handle market fluctuations and maintain the necessary equity levels to avoid forced asset liquidation. Now that you know what the maintenance margin is, you can use the facility better and ensure effective regulatory compliance.
