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# A Complete Guide on How to Use Margin Calculator

4.4

In the last chapter, we have already understood the various types of margins which are required at the time of initiating a future trade. The margins depend on the volatility of underlying which is why they vary from one future contract to another.

Margins enable the traders to leverage which is why they play an essential role in Futures Trading. As compared to the spot market transaction, it is the margins which gives the future agreement the much needed financial twist, which is why it is essential to understand margins and its facets.

It is essential to understand the concept of margin while trading in futures and options, which is the most crucial concept of. Why is it most important? This is because you need to deposit an initial margin with the broker when you start trading in F&O. Initial margin safeguards the interest of the broker in a case where the buyer-seller makes losses while trading in future and options when the price is volatile.

## How can you trade on margins?

While trading you can trade in multiples of initial margin which you deposit. Let us understand this within example- let us say You want to invest rupees 20,00,000 in future and options when the margin is 10%. Now you will need to deposit ₹2,00,000 with the broker as the initial merge in. This is the multiple that you trade-in, which is called leverage.

It becomes easier for you as a trader to trade on margins and enter into trading opportunities because now you will not be concerned about the large outlay of cash which is required to acquire an asset.

This is why margin interest which is the interest that is due on loans which are made between traders and brokers.

When you trade on margins, you can trade in multiples of the initial margin which you deposit with the broker. Let's understand this with an example- Rajesh decides to trade, he wants to invest rupees 20,00,000 in futures and options. The margin is 10%. He'll need to deposit rupees 2,00,000 with a broker. The multiple the deposit which he can trade in is called leverage.

Why did Rajesh opt for trading on margin? He did so because it is easier for him as a trader to enter into trading opportunities. After all, now he's not concerned about the large outer of the cash which is required to acquire an asset.

Now if Rajesh short sells a stock, he must first Borrow it on margin and then sell it to a buyer. Or if he purchases on margin, then he'll have to offer the ability to leverage his money to buy more shares than the cash he outlayed.

Let's consider another scenario - when the margin is 10% and Rajesh Can buy the shares worth ₹3,00,000 with just ₹30,000. The margin of ₹2,70,000 is granted to him as a margin loan for which he will have to pay interest.

Rajesh is a wise trader when he knows that he needs to understand how much interest is calculated because he might need this calculation to be handy in the time of need. What we learn from Rajesh's example is that it is crucial to understand all the terms and calculations before we get into the trade.

When you are running a calculation, you need to find out the margin rate interest your broker-dealer is charging when you borrow the money. Your broker must answer this question transparently. You should also visit the website of the form as it can have some valuable information for you. Along with this, you must also find out account confirmation statements or monthly or quarterly account statements.

Now let's have a look at various types of margins:

### Types of Margin:

1. NRML – when you intend to buy and hold future trade, you must use NRML, which is a standard product type. There is no additional information available with the risk management system when you use NRML. In the case of NRML, you can hold the contract till expiry as it does not have any information on the stop loss. When you suffer losses, you will have to produce the required margins. Due to the lack of clarity, the broker’s RMS system charges you with full margins, that is SPAN and Exposure. When you intend to buy and hold the future positions over multiple days, you must use NRML. You can also use the NRML product type for intraday.
2. Margin Intraday Square off (MIS) – MIS is a product type which as per RMS system is for intraday trade. MIS is better than NRML in terms of information flow. As a trader, you will be exposed to the volatility of 1 day since MIS is intraday when you select MIS as an order type the position will not be carried forward to the next day. You will have to cut the position by 3:20 pm, or the RMS system will do it. This is why the margin requirement in MIS is lower than the NRML margins.
3. Cover order (CO) – Cover order is also an intraday product like MIS. Cover Order differs in terms of additional information it provides on the stop-loss. You will be required to specify the stop-loss information while placing a CO. The CO will produce the following information:
• The maximum loss you will have to incur if the trade moves against you, which is called the stop loss.
4. Bracket Order (BO) –  The BO is an advanced version of Cover Order. BO is versatile and intraday order, therefore, you will have to square off the orders within the day before 3:20 pm. You will have to provide the following information while placing a BO:
• The stop loss –  What is the amount of loss you will have to incur as a stop loss in case the trade moves against your goals.
• The Trailing stop loss – Another essential feature of BO is the trailing stop loss which is a day trading order. As per trailing stop loss, you can set a maximum value or percentage of the loss you can incur on a trade. The stop price moves with the rise or fall of the security price in your favour. If the security price is not in your favour and it rises or falls, then the stop stays in its place.
• Target – You will have to provide information on the price at which you will like to book the profits if the trade moves in your favour.

#### Wrapping up

Now that you understand how margins are calculated, it’s only logical that we move on to the next big topic - How to price a future's contract? To discover the answer, head to the next chapter.

#### A Quick Recap

1. When you are running a calculation, you need to find out the margin rate interest your broker-dealer is charging when you borrow the money.
2. NRML – when you intend to buy and hold future trade, you must use NRML, which is a standard product type.
3. Target – You will have to provide information on the price at which you will like to book the profits if the trade moves in your favour.