Margins can be defined as the collateral the trader deposits to their broker to cover the risks that may be generated in the future. A margin is often a fraction of the trading money and is usually expressed as percentages. Margins are the minimum amount of securities or cash (collected as collateral) that must be present in a person's trading account if they wish to make some trade. The main purpose behind margin setting is to ensure that the traders have the cash to back their trades in the stock market.
Peak Margins came into effect on the 1st of December 2020. SEBI brought it about to bring a higher level of transparency in trade. Peak Margins are the regulated margins introduced mainly to ensure the control on the leverages becomes stricter. Due to the introduction of Peak Margin, most of the excessive speculation also became controlled since the margin started to be collected upfront. Unlike the old way, i.e., at the end position of the day.
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Earlier, the obligation margin was calculated as the trading position percent present at the day's end. After the introduction of Peak Margin regulations, to calculate the clearing corporations, snapshots of four random trading positions are taken by the exchanges and clearing corporations. The highest among those four is considered the Peak Margin of the day. Discover the Margin Calculator and calculate your margins manually.
Peak Margin came into effect in four phases.
For the final phase, if a trader wants to trade something worth Rs. 10 Lakhs, he must have the required margin, say Rs. 3 Lakhs, for the trade.
Every stock and derivative has a unique margin requirement determined by exchange capital based on volatility. The margin is directly proportional to the market volatility. Brokers used to over-extend their commissions to increase their trades and attract customers.
Due to this, the trader had access to take high-risk trades with little to no capital.
Peak Margin regulations proved beneficial for the brokers. Because if the trade went wrong. Then the trader faced big losses, but the broker, on the other hand, vanished.
Consequently, the high-risk bets by traders became a systemic risk for the brokers.
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The penalty rate is usually between 0.5% to 5% per day.
The best and most effective way to avoid penalties due to a shortfall of the margins is by adding funds before midnight on the day you want to buy a trade.
When the trader fails to meet the demands set by the broker and abides by the rules of the SEBI's new rules, the condition is termed a margin call. It can have severe consequences for the trader, as the broker can sell the trader's position even without a margin. The broker can also charge interest and additional fees in the case of a margin call.