One of the most vital things to grasp if you are trading in futures and options (F & O), is the “margin” concept. Before you even start your trading journey in this area, you are required to make a deposit of what is known as an “initial margin”. This must be deposited with your broker. When you use a margin calculator, this margin is taken into consideration, but you should know a little bit more about the margin itself first.
The margin (an amount of capital) that you deposit with your broker has an aim. It acts as a safeguard, protecting the broker in case a buyer or a seller makes losses when trading in futures and options. These losses may well occur due to volatility in prices and are not in anyone’s control, but brokers must have some protection. To trade in futures and options, you need to have a trading account, much like you do when you trade in stocks, but there is no need to open a demat account when you are trading in F & O. The margin that you deposit with your broker will be in your trading account. Before you even think of a margin calculator, you must get an idea of what it's used for.
The initial margin you have deposited allows you to trade in multiples of that margin. For instance, in case the margin is 10%, and you wish to invest Rs. 10 lakh in your F & O, you will have to make a deposit of Rs. 1 lakh with your broker. Such a multiple that you trade with is known as “leverage” in F & O trading. Furthermore, you should be aware that margins are different depending on the index and the shares traded in. This is the reason why you require an F & O margin calculator to get a clue about the margin that has to be traded in the index or the equity F & O you want.
Undoubtedly, futures and options trading may be difficult to understand for many savvy investors, and you may be wanting to forget it altogether and rather invest in an upcoming IPO . Of course, you can do this to diversify your portfolio, but once you are aware about F & O trading, it may offer you some lucrative and safe trading options. Coming back to margins and the calculators associated with them, it is essential that you comprehend the kinds of margins in F & O trading. One of these is SPAN, an acronym that stands for “standard portfolio analysis of risk”.
A SPAN margin calculator makes use of algorithms to determine what margins can be. This is important for any investor to know about before they undertake an F & O contract, as it tells you what initial margin you require equivalent to the most loss that any portfolio could experience in terms of many scenarios. The SPAN margin calculator is an online tool which undergoes a revision at regular intervals within a day. Therefore, in turn, the calculator tends to give investors different results at different times of the day.
Brokers collect margins from investors in order to safeguard themselves from any fallout of a trade. A SPAN margin calculator is just one among those that help traders to know about SPAN margins and how they may affect trades in futures and options. Apart from futures and options, one can trade in direct equity, and open a demat account. Here, no margins are involved. Alternatively, to trade in the stock market, you can apply for an upcoming IPO.