Introduction

It is a known fact that the share market is subject to risks. The volatile market is rewarding yet can lead to losses if not trod carefully. Considering this, most brokers maintain a margin on your orders. This is the minimum account balance you are required to maintain in your trading account. This is especially crucial when you trade in derivatives like Futures and Options. But what happens if you fail to maintain this margin? Let's learn all about it in this article.

Non-margin maintenance = Margin shortfall

If you fail to maintain the upfront cost, also known as margin, you incur a margin shortfall. This is the difference between the margin criterion set by the Securities Exchange Board of India (SEBI) and the funds or funds you have available in your trading account.

You get an overview of the margin required on the order window when you are about to bid on an order. However, it is worth noting that the margin requirement may change for open positions even after you execute the order.

Predominantly used for derivatives, margin is also required for assets like equity, currencies, and commodity trading. They are applicable to exchanges like the National Stock Exchange (NSE). Bombay Stock Exchange (BSE), and Multi Commodity Exchange of India Limited (MCX).

Non-maintenance of the required margin can lead to forced liquidation, increased losses, or add to your ongoing deficit. Hence, it is in your best interest to avoid these repercussions.

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Examples to understand margin shortfall

Here are some instances to

1.  A sudden drop in stock value

Let's say you are holding a long position in a stock but then unpleasant news whether it is global or Indian impacts your stock. This means the value of the stock drops. Due to this decline, if it is substantial, you may go below the required margin and a margin shortfall occurs.

2. Increased leverage causes a drop

Let's say you are maintaining a leveraged position while trading in currency. This is usually done with a desire to benefit from the steep price movement. However, the market may not always behave the way we predict despite the efforts put into technical and fundamental analysis. If so, the losses may be significant and affect your margin, causing a margin shortfall.

Causes of margin shortfall

Outlined below are some reasons that explain why and how a margin shortfall occurs:

• Volatile market

When the stock market is subject to huge price swings, the stock prices decline. If it falls rapidly, it may affect the margin and cause margin shortfall.

•  Increased haircut

A haircut refers to the reduction value applied to the market value of your securities. It is used as a collateral. If it increases, suppose from 20% to 30%, the stock's value contributes to the margin decline.

• Compromised risk-management measures

If you don't have effective risk-management strategies in place, such as opting for a stop-loss order, you can get subjected to hefty losses which can lead to margin shortfalls.

• News or events affecting market direction

Some global events and news within the country can cause unexpected market shifts. Some examples include geopolitical events, natural calamities, economic amendments, etc.

• Market to Market (MTM) losses

MTM losses are the losses recorded when the current market value of a financial asset falls below its previously recorded price. When this happens, it can affect your available margin balance.

• Increased leveraging

If you have borrowed more than you need to for trading, which is known as leveraging. Your flexibility is reduced. Meanwhile, if the stock price reduces, your collateral and haircut value may be insufficient to cover the margin.

Steps to avoid margin shortfall

Prevention of a margin shortfall saves you the stress of dealing with it. Here are some cautionary steps you can take:

• Avoid holding Margin Trading Facility (MTF) positions overnight is likely to cause margin shortfall as margin requirements may change overnight.

• As discussed, margin rules are subject to change. It helps to keep an eye out for such updates.

• All your investments that qualify must meet margin requirements. So, review your portfolio regularly to ensure the same.

• You want to adapt your risk-management strategies to the market conditions to avoid swift changes in your margin maintenance.

• It always helps to have a little over the minimum requirement to reduce the risk of margin shortfall.

Conclusion

A margin shortfall may sound like a technical and complex term. But by now, you may have understood the simplicity of it all. It simply refers to the consequence if you don't maintain enough funds or securities in your trading account as per the requirements of SEBI. This is adhered to by your broker. So, stay vigilant and prepare and avoid scenarios where you can risk going lower than the margin requirement.