What Is Margin Trading In Derivatives?

The capital markets, largely comprise of two segments: one is the cash segment and the other is the derivative segment.

In the cash segment, you pay entire cash and take delivery of your shares. In the derivatives market, you do not own any shares, you just buy quantity of shares, which have to be settled at a later day. When you buy these lots in the derivative segment, you do not have to pay the entire amount.

Let us understand the margin trading derivatives with an example. When you trade in the future segment, you have to buy in lots. For example, one lot of Bank of India comprises 3000 shares. If you buy 3000 shares of Bank of India at Rs 130, the cost works out to Rs 39,0000.

But, in margin trading in the derivative segment, you need to pay only margins and not the entire amount of Rs 390,000. At the moment, the margin fixed for Bank of India is just 13 per cent. So, you may end-up paying just Rs 52,000 in place of Rs 390,000.

Margins in the derivatives segment vary from share to share and is fixed by the exchanges. This largely depends on the volatility and other aspects.

For example, IndiaBulls Real Estate has a margin requirement of 19 per cent. What this means is that you need to pay as much as 19 per cent of the total value as margins for trading in the derivative segment of IndiaBulls Real Estate.

For example, J P Associates commands a margin of as much as 21 per cent. This is largely on account of the volatility of the stock. The higher the chances of the stock going down sharply, greater would be the margin set by the exchanges. In fact, the exchanges carefully analyze stocks and set margins.

The Bank Nifty and the Nifty have the lowest margin of just 8 per cent. This is because the exchanges expect less volatility in the index as compared to individual stocks.

Where to find margin requirements of the derivative segment?

Most brokers would be able to provide you with the margin requirements for trading in the futures segment of the derivatives market. These margin requirements can change everyday depending on the volatility and movement of individual stocks and the markets as a whole.

You need to check with your broker and ensure you have sufficient funds, before buying and selling the futures segment segment of the derivatives market.

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