In this article, we will discuss
- What is Margin?
- What is a margin calculator?
- How is Initial margin calculated?
- Check our Video on Span Margin Calculator
- What is SPAN margin?
- What is exposure margin?
- What is profit?
- How is stock profit or loss calculated?
- What is Brokerage?
- What is a profit calculator?
- How to calculate stock profit/loss?
- Difference between Margin calculator and Profit calculator
If you are a stock trader, then nobody understands the importance of time better than you. Every second is crucial when placing a buy or sell order. As time is crucial, calculating brokerages, margin,s or net profit manually every time before the trade is tedious and time-consuming. Margin calculator and profit calculator are both financial tools designed for traders and investors to take quick, error-free and informed decisions pertaining to their trades. These online tools provide accurate results instantaneously upon inputting certain data thereby saving significant time of traders on complex analysis. However, What is a margin calculator?, What is a profit calculator? How are they different from one another? In this article, we will understand these two financial calculators in detail.
What is Margin?
Margin is an amount that a trader has to deposit with the stock broker before buying or selling derivatives like Futures & Options (F&O). The margin acts as a security deposit and helps to prevent counter-party risk in case of default. This is similar to the money that needs to be deposited with the landlord before we rent a property so that in case the tenant defaults in payment, it can be deducted from the deposit amount. Margins are required to be paid by both the Long and Short position holders. The margins are different from profit or losses. Margins are fixed by exchanges in order to safeguard stockbrokers when traders experience losses.
What is a margin calculator?
Knowing how much margin is required to be maintained is essential before placing an F&O order. This is done with the help of a margin calculator. A margin calculator is an online tool that calculates the margin required for a particular trade, taking into account several factors such as time, price and volatility. Higher the volatility, higher the margins required. Also, higher the probability of incurring a loss, higher is the margins. As per latest exchange circular, it is mandatory to collect SPAN margin, exposure margin and net buy premium margin at the time of placing a derivative trade by the stock broker.
How is Initial margin calculated?
Initial margin is the amount that is collected upfront at the time of entering a position in F&O trade. Initial margin is calculated on a portfolio of futures and option positions using a software called - SPAN (Standard Portfolio Analysis of Risk) and exposure margin.
Check our Video on Span Margin Calculator
Initial margin = SPAN + Exposure margin
While the SPAN margin is the minimum amount blocked when entering into an F&O positions as per the calculation, exposure margins are money blocked over and above SPAN margin to cover for any potential ATM (at-the-money) losses.
What is SPAN margin?
SPAN margin is the minimum margin that is required to be collected by the stock broker when traders enter into a derivative contract. This margin is determined by exchanges. The span margin is variable, meaning it fluctuates throughout the day depending upon the volatility in the underlying contract. SPAN is a calculation developed by Chicago Mercantile Exchange (CME) and is used to calculate margins for derivative trades. SPAN uses scenario based approach to arrive at the adequate margins. It generates about 16 different scenarios and for each of these scenarios, possible loss that the portfolio would suffer is calculated. The maximum loss that the portfolio would suffer in any of the scenarios considered in one trading day would be the initial margin required to be paid. SPAN calculation logic is not disclosed publicly & it is a tough calculation. SPAN margin is monitored and is revised 6 times in a day. When the volatility in the position increases during the day, the stockbroker would call upon the trader to increase his margin. Similarly, when the volatility decreases the stock broker may release some of the margin blocked earlier. Investors can easily calculate SPAN margin at Samco app or website free of cost.
What is exposure margin?
In addition to the SPAN margin, exposure margin is also collected by the stock broker to cover any additional risks that may arise due to erratic swings in the market or any Black Swan Event. This amount is decided by the stock broker. Unlike SPAN margin, exposure margin does not fluctuate and is fixed at the below rate:
- For index futures and index option sell positions, it is 3% of the notional value.
For futures on individual stocks and sell positions in options on individual securities, it is higher of 5% or 1.5 standard deviation of the LN returns of the security over the last 6 months on the notional value of the position.
What is profit?
When the selling price of any goods or service is more than its manufacturing or buying cost, the transaction is said to be profitable. Whereas, when the selling price is less than the buying or manufacturing cost then it is said to be a loss-making transaction.
How is stock profit or loss calculated?
In securities trading, stock profit refers to the profit incurred when the selling price of a share is more than the buying price, brokerage and other charges such as securities transaction tax, exchange charges, SEBI turnover fees, GST and stamp duty. Calculating the brokerage and other charges on the stock is an important part of calculating the profit or loss in a share transaction.
What is Brokerage?
Brokerage is the fees paid to the stock broker for facilitating a trade. Every brokerage house charges a brokerage fee. However, the brokerage fee varies depending upon the type of stock broker. There two types of stock brokers – full service brokers and discount brokers. A full-service broker, as the name suggests, provides additional services such as advisory service, guidance and stock recommendations whereas a discount broker purely facilitates buying and selling of stock. Depending upon the requirement, a trader may opt for either a full-service broker or a discount broker. However, the key difference between these two types of brokers is in the brokerage charged by them. A full-service broker charges higher fees as compared to a discount broker. Therefore, a trader must compare the brokerage before choosing a stock broker as this will have an impact on his final profit or loss. To know the brokerage charged by SAMCO click here
What is a profit calculator?
Profit calculator is an online tool provided by several stock brokers to calculate the total profit or loss made in a stock trade after a few simple inputs. A transaction is profitable when the selling price of a share is more than the buying price of the stock, brokerage and other charges, as discussed above. Using a profit calculator, a trader can calculate the entire brokerage costs and other transaction costs for his trade before executing the trade. This will help him to get an accurate picture of his profit, loss or break-even in advance, which will help him to make an informed decision. This can be done for both Intraday trading and Delivery or Carry Forward Trading. Profit calculator also provides accurate details about the brokerage fees and several other transaction costs instantaneously and without an error. This helps in saving time as it would have taken longer with manual calculation and thereby facilitates speedy execution of trade. Samco’s brokerage calculator, besides giving a complete breakdown of all the various transaction charges also tells the profit or loss on particular stock trade.
How to calculate stock profit/loss?
Formula for stock profit/loss is given below: Profit (P) = ((SP * NS) - SC ) - ((BP * NS) + BC ) Where: SP is the selling price per share, NS is the number of shares, SC is the selling commission, BP is the buying price per share, BC is the buying commission.
Difference between Margin calculator and Profit calculator
While a margin calculator is a tool used by traders and investors to calculate the amount of margin required to enter a futures or options trade, a profit calculator is used to calculate the total profit or loss made in a stock trade. Margin calculator is essentially a risk mitigating tool used to safeguard stockbrokers when traders experience losses. Profit calculator is used to facilitate profit calculation in advance of carrying out a trade. Margin calculator can be used to increase profit in F&O trade. Eg: If 1 lot of Nifty, lot size = 50, is bought at Rs. 17,644 then margin required would be Rs 99,974. Therefore, almost Rs 8.8 lac worth of Nifty could be bought by paying a margin of just Rs 99,974. Upon just 1% profit on nifty, a trader would essentially make profit of Rs 999.74 and not just Rs 176.44. This way profits can be increased. However, just as profits can multiply, losses can also multiply.
Conclusion
Margin calculator helps traders to know the margin that they require to maintain with their stock broker beforehand. This helps them to plan their finances better and avoid paying additional charges as a penalty. The profit calculator helps the trader to arrive at actual profit by understanding the various charges such as brokerage fees, STT, taxes etc. Traders can use both margin calculator and profit calculator effectively to save on time and cost analysis. Visit Samco platform to check various investment options that will help you to meet your financial objectives. If you want to start your investment journey, open a demat account with Samco for free. Get free brokerage trading for 1st month and pay flat Rs 20/order thereafter.
Leave A Comment?