TNN Jun 5, 2006, 12.14am IST

In the recent stock market mayhem, margin calls have been blamed for deepening the crisis.

By now, market players have a fair idea of the extent of damage that can be caused, if they fail to chip in additional funds as margin money to support their excessive positions in the market.

But, for prospective investors who are yet to try their luck in the stock market, it’s important to get familiar with some vital stock market terms like different types of margins.

The surveillance system of Indian stock exchanges requires payment of different types of margins by brokers and clients to avoid possibility of payment crisis in a falling market.

In the F&O segment, market players are allowed to build up large speculative positions on payment of only part of the total transaction cost in the form of upfront or initial margin and additional margin, depending upon the trend in the market.

What are different types of margins collected by stock exchanges?

They are Gross Exposure Margin, Daily/Initial Margin, Special Margin, Mark to Market Margin, Volatility Margin and Ad-hoc Margin.

What is the gross exposure margin?

It is payable on daily outstanding scripwise positions. The exchange asks brokers to make certain security available to it in the form of cash, bank guarantee or shares to safeguard against any default of payment against positions taken on a particular day.

Gross exposure margin is normally paid in advance of transactions.

What is daily/initial margin?

At end of every trading day, brokers are required to collect margin payable against open positions either on the buy side or on the sell side from its clients.

Daily margins are collected to safeguard against eventualities that might occur between two trading days.

In the derivative segment, both the buyer and seller have to deposit initial margin before the opening of the day of the Futures transaction.

The margin is normally calculated taking into consideration changes in daily price of the underlying (say the index) over a specified historical period (say past one year).

What is special margin?

Special margins are imposed on stocks which witness abnormal movement in price or volume. It is a surveillance measure intended to check speculative activity in particular scrip. At the BSE, the margin is levied at 25% or 50%.

This largely depends on the sharpness in the movement of share price or volumes, clientwise net outstanding purchase or sale position or on both sides.

What is mark-to-market margin?

Mark to market margin is the amount of difference that a buyer or seller has to pay when the market price falls below the transaction price or rises above the transaction price.

The margin is calculated on the basis of difference between a particular day’s close and the previous day’s close. It is mostly applicable in the F&O segment.

What is volatility margin?

The volatility margin is imposed to check abnormal intra-day fluctuations in any scrip. The objective is to ensure that buyers and sellers honour their commitments even if there are wild swings in share prices.

Volatility margin is generally calculated by working out the difference between the highest price and the lowest price over a 45-day transaction cycle and comparing it to the lowest price. The margin is paid in cash or in form of demat shares.

What is ad-hoc margin?

The Sebi-prescribed Ad-hoc margins are imposed on brokers with very large position overall or in specific low price stocks which are illiquid.