Zerodha Margin Facility
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Zerodha, as per its margin policies, is not in the business of finding clients. It expects all its clients to have a sufficient amount in their accounts for the continuation of trading.
However, it provides a margin for intraday trade only.
The initial margin which consists of the SPAN margin and the Exposure margin is collected as per the rules mandate by SEBI.
SPAN margin measures the risk faced by the stock. It is calculated on the Value at Risk model.
The Exposure margin is calculated on the premise of the degree of exposure faced by the stock. It is also known as the Extreme Loss Margin.
The SPAN margin and the Exposure margin add up to make the initial margin.
A pertinent question that crops up is why are Margins charged?
Margins are charged from the point of view of Risk Management. The Risk Management System (RMS), which is placed at the broker’s office is responsible to oversee any sign of risks and hence responsible for the overall risk management scenario.
The RMS is primarily a computer program and all the orders that the clients’ place, passes through the RMS. It is only after the RMS approves, that it reaches the exchange.
It is important from the margin perspective; this is the reason why it is charged. Market volatility and degree of exposure decide the initial margin, as it has been mentioned before.
Zerodha Margin policies suggest that margins are allowed for intraday trading only.
Zerodha does offer up to 20 x exposure on selected stocks. However, on delivery trades, it does not provide any margin. It suggests that clients have sufficient funds in the trading account to take the delivery of shares.
In the event of the client failing to do so, Zerodha will go ahead and cut the positions.
Zerodha Margin is provided through 3 different types of products:
Zerodha provides leverage of almost 3 to 12.5 times in MIS. This though depends on the stock. The Zerodha margin calculator is handy in this regard. It provides all the relevant margins needed for trading.
For MIS in Future and Option:
- The margin required is 35% of the NRML margin, for Index futures and option writing
- Consequently, the margin required is 45% of the NRML margin, in the case of Stock Futures and Option writing.
- Moreover, the margin required is 50% of the NRML margin, in the case of Commodities and Currency futures.
It needs to be told that Bracket Order and Cover Order provides higher leverage than MIS because a stop loss is placed to minimise risk and therefore limit the loss. This is done with the initial buy or sell order.
As a result of this, the risk reduces and hence the leverage increases automatically.
Zerodha Equity Margin
The Zerodha Margin about Equity can be best understood through the Zerodha Margin calculator.
There are three product types that we need to be aware of:
- CNC: CNC or Cash and Carry is a delivery trade. This kind of trade does not have leverage. The shares that are brought get delivered directly to the Demat account and the ones sold get debited directly from the Demat account.
- MIS: MIS or Margin Intraday Square off is strictly for intraday trade. These kinds of trades are allowed between 9.15 am to 3.20 pm. However, the timings are subjected to change. The market volatility plays an important role in it.
Not all stocks will have intraday trading. Only a select list of stocks is allowed to trade in MIS.
- CO: CO or Cover Order trade are those which have a stop loss attached to them.
Let us look at the Exposure Margin for Equity:
- The Zerodha margin for Equity delivery is 1x with no margin
- The Zerodha Margin for Equity Intraday is up to 20x. This, however, is based on the stocks.
For the stock: 3MINDIA: EQ which is an Equity stock, the CNC leverage is 1x while the MIS leverage is 5x.
The Intraday trade attracts leverage to about 150 stocks, whose positions are squared off before the end of the day. This is the reason why the leverage provided is up to 20x.
However, for Delivery trade, where positions are held overnight, the product type CNC attracts the leverage of only 1x.
A quick example of the same would be:
If a trader wants to buy stock worth INR 2,00,000 as CNC, then he/she needs to have INR 200000 in his/her account.
If someone wants to sell shares worth INR 200000, then it is expected that shares worth the said amount are present in the Demat account, which is mapped to the trading account.
For Cover Orders and Bracket Orders, which are essentially intraday trade, it is mandatory to have stop loss attached to them.
Since this lowers the risk, the leverage automatically increases. Hence, when one trades using the Cover Order, the leverage provided ranges from 6x to 20x.
Zerodha F&O Margin
The SEBI regulations stipulate that the broker collect the initial margin upfront. This will be done to allow the Future and Options positions to be carried forward the next day.
It is important to know that the settlement cycle is T+1 for Futures and Options.
This means that the credit that arises from the sale of options and the profit generated from the Future and Options positions, will be made the next day.
When Market orders are sent for Option in several lots, the system checks the margin of the first lot. After that is done, it validates the lot.
The client is liable to check whether all the positions pertaining to MIS, Cover Order and Bracket Order are squared off at the end of the day, even though they happen automatically.
Zerodha Equity Future Margin
Zerodha margin for Equity Future offers the following products:
NRML: NRML or Normal is essentially a position held.
All stocks, namely, overnight or intraday trade futures can use NRML. Once such a position is taken, it can be held till expiry.
However, the required NRML margin needs to be present in the trading account of the trader.
MIS: MIS or Margin Intraday Square off is something that we have seen before. These are essentially intraday trades. They are traded between 9.15 am and 3.20 am. However, these timings can change as per the volatility of the market.
CO: CO or Cover Order is a Market Order with a Stop Loss. Zerodha is one of the few in the country which settles with NSE on T+0. Hence, this is the reason why it has one of the lowest NRML margin requirements.
MWPL: MWPL or Market Wide Position Limits are essentially position limits that have been imposed by the Exchange.
The Exposure margin for Equity Futures:
For Intraday: 40% or 2.5 x
If the position is being carried forward, then the exposure margin would be 100% of the total margin. The total margin is the combination of SPAN margin + Exposure margin.
Zerodha Commodity Margin
For Zerodha Commodity trading, intraday trading (MIS) is allowed. However, the stocks are all Non Agricultural products. The only stocks which are not traded are Brent Crude and Silver 1000.
It is also to be noted that the leverage being provided by Zerodha is subjected to the market conditions.
50% of the SPAN margin is required to trade intraday.
If the trading is done in Normal (NRML) positions, then 100% of the SPAN margin will be required.
That would mean the Exposure margin for Intraday trade is 2x while for a position that will be carried forward it is 1x.
It is also pertinent to know that for Commodity Futures all Intraday (MIS) positions are squared off approximately 25 minutes before the close of day.
The Zerodha Commodity calculator signifies the same:
As can be seen, the heads under which the calculations are done are:
- Lot Size
- NRML Margin
- MIS Margin
Zerodha Currency Margin
Zerodha Currency Margin has three product types on offer:
NRML or Normal is a position that can be taken for Intraday as well as Overnight carried forward positions.
When a position is taken as NRML, it can be held until expiry provided the required NRML margin is present in the trader’s account.
MIS or Margin Intraday Square Off is essentially the trade that takes place within the same day (Intraday), between 9 am and 4.30 am. All open positions are squared off at 4.30 am.
The additional Leverage offered for using MIS is 50% of the NRML margin.
Cover Order is the market order with a stop loss arrangement. This is essential to minimise risk and prevent the trader from facing a loss. The mechanism of stop loss is a beneficial tool along with the Bracket Order.
The Exposure margin for Zerodha Currency Margin is:
Currency Future: Intraday is 50% or 2x. If the position is carried forward, then the Exposure margin is 100% or 1x of the total Margin.
Currency Options: Intraday is 50% or 2x. If the position is carried forward, then the Exposure margin is 100% or 1x of the total Margin.
The total margin, as discussed previously is the combination of SPAN margin and the Exposure Margin.
The Zerodha margin facility is primarily focused on providing leverage in selected segments and helping the client amplify returns.
On the other hand, Zerodha margin policies also state that they do not fund clients and expect the client to have sufficient funds in their trading accounts.
Zerodha, as we have seen, does not deal in the delivery of trades. It is again expected that the client will have enough shares in the account, failing which the broker might cut the position.
In conclusion, trading with Zerodha will certainly be a fulfilling experience, given their expertise in technology and trading parameters.
Zerodha Margin FAQs
Q1: Is Zerodha involved in client funding?
No.As per the Margin policies, Zerodha is not in the business of funding clients. It expects the client to have sufficient funds in their trading accounts.
Q2: What are the commodities which are allowed to be traded?
All non-agricultural commodity is allowed to be traded through intraday (MIS) trading. However, Brent Crude and Silver 1000 are excluded from the list.
It also needs to be known that the leverage provided is subjected to market conditions and any volatility that appears will reflect on the leverage figures.
Q3: Does Zerodha allow short selling?
Zerodha allows short selling for the Equity Future and Options segment, for both intraday trade and overnight positions.
It also allows short selling in the Equity Cash segment. However, this will only be for intraday trade and no overnight positions.
Q4: What is a Zerodha Demat account?
It is an online account which is used to hold the financial securities such as stocks, shares and mutual funds. All this will be stored in the electronic form. A Demat account makes trading fast and safe.
The Demat account is opened with CDSL. It is however serviced by Zerodha.
Q5: Why is a margin charged?
An initial margin is a combination of SPAN margin and Exposure Margin. The SPAN margin is calculated by a software called the SPAN and it calculates the value of risk on respective stocks.
The exposure margin is calculated based on the degree of exposure faced by each stock. It is also called an Extreme loss margin and is charged over and above the SPAN margin.
It is charged to cover for the sudden changes in the market prices and volatility.