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MAINTENANCE MARGIN

Discuss MAINTENANCE MARGIN within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; MAINTENANCE MARGIN : THE MINIMUM ACCOUNT BALANCE THAT AN INVESTOR MUST MAINTAIN IN HIS MARGIN ACCOUNT. IF THIS MARGIN IS ...

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Abhijeet S
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MAINTENANCE MARGIN - September 13th, 2010

MAINTENANCE MARGIN :

THE MINIMUM ACCOUNT BALANCE THAT AN INVESTOR MUST MAINTAIN IN HIS MARGIN ACCOUNT.


IF THIS MARGIN IS NOT MAINTAINED, THEN THE BROKER WILL EITHER FORCE THE INVESTOR TO DEPOSIT MORE FUNDS OR WILL SELL STOCK TO PAY DOWN THE LOAN.


THE BROKER WILL DECIDE ON WHICH STOCK TO SELL.


THE MAINTENANCE MARGIN IS IN ADDITION TO THE INITIAL MARGIN. THE MAINTENANCE MARGIN SHOULD BE AT LEAST 40% (AS SET BY SEBI).


WHENEVER THE AMOUNT IN THE MARGIN ACCOUNT GOES BELOW THE MAINTENANCE MARGIN, THE BROKER WILL ISSUE A ‘MARGIN CALL’ .


THE INVESTOR WILL THEN HAVE TO PAY THE MARGIN ON A T+1 BASIS, I.E., THE CHEQUE WOULD HAVE TO BE PAID TO THE BROKER THE NEXT DAY.


THE INVESTOR ALSO HAS TO PAY INTEREST ON THE LOAN AMOUNT.


ALL STOCKS DO NOT QUALIFY TO BE SOLD ON MARGIN. THE SEBI DECIDES WHICH STOCKS ARE MARGINABLE.


HOWEVER, INDIVIDUAL BROKERAGES CAN DECIDE NOT TO MARGIN CERTAIN STOCKS TO AVOID HUGE RISK INVOLVED WITH THEM.


EXAMPLE

SUPPOSE YOU DEPOSIT RS. 50000 IN YOUR MARGIN ACCOUNT.


THEREFORE, YOU HAVE RS. 100000 WORTH OF BUYING POWER.


IF YOU BUY RS. 25000 WORTH OF STOCK, YOU STILL HAVE RS. 75000 IN BUYING POWER REMAINING.


THUS, YOU HAVE ENOUGH CASH TO COVER THIS TRANSACTION & SO, YOU HAVEN’T TAPPED INTO YOUR MARGIN.


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