The additional money the stockbroker pours into your trading account to complete a transaction is known as margin money. Exchanges set minimum margins to act as a security deposit for trading and collect from the client. Here are the components of margins:
Initial Margin: This is the amount desired to be the lowest upkeep to process the future investment. It is a mandatory deposit that gives a security buffer to the exchange to initiate a futures or options position. Furthermore, these margins are known as Upfront Margin. Here are two components of the initial margin:
· SPAN Margin: This is a risk-taking initial margin set up by the exchange in writing a future and options position. SPAN(Standard Portfolio Analysis of Risk) helps calculate this margin. It is usually calculated based on factors like the underlying asset's volatility and contract value.
· Exposure Margin: This margin is collected to cover the potential losses based on the portfolio's exposure to price movement. It helps in more minor margin requirements to cover possible losses and factors like the total value of open positions, market volatility, and other risk parameters.
Maintenance Margin: This can be also known as Variation Margin. It is the minimum amount of collateral required to be in a trading account for a futures & options position to be open. After the purchase, the lowest amount of equity needed margin accounts.
Premium Margin: This is a security deposit that an option trader or client pays to cover the potential loss after liquidating the daily closing price.
Market-to-Market Margin (MTM): These are additional margins that brokers may collect intraday or at the end of the trading day. These margins are also known as Non-Upfront Margins. MTM in investing generally refers to the daily settlement of gains or losses based on the asset's market price changes.
Additional Margin: These margins are ad-hoc margins. They are collected to recover the initial margin requirement. Also, they help in mitigating increased risk.