What is Delivery Margin- All You Need to Know

Delivery margin is the margin that you need to pay if you want to buy shares on the stock exchange (BSE or NSE) and hold them in your Demat account.

The delivery margin is the only amount that you need to pay at the time of buying stocks from your broker. SEBI has made it mandatory for brokers to collect a 20% delivery margin on every share transaction. This rule is also applicable to intra-day trading and futures trading. If a broker violates this rule, he may face penalties from SEBI or even jail time. You can find out the delivery margin component applicable to every stock by going through the contract note provided by your broker.

Understanding margin for delivery trading can save one from running into a lot of trouble during their investing journey.

Meaning of Delivery Margin

Delivery margin is the margin that you need to pay if you want to buy shares on the stock exchange (BSE or NSE) and hold them in your Demat account.

The concept of margin works like this: You are borrowing money from your broker to buy a stock. Your loan amount will be used as collateral, while still allowing yourself some room for profit or loss during trading activity. The difference between the price at which you sell and what it costs to purchase an instrument will be called the “delivery margin.”

The margin is the only amount that you need to pay at the time of buying stocks from your broker.

The delivery margin is the only amount that you need to pay at the time of buying stocks from your broker. The delivery margin is calculated daily, and it’s always higher than the prevailing market price.

The concept of delivery margin was introduced in the 1970s when exchange-traded funds (ETFs) came into being. When an investor purchases an ETF through a broker or directly from an index provider, they can choose between two options: buy-and-hold or day-trading (or ‘margin’). The latter involves borrowing money against their assets in order to profit while holding them for longer periods of time without selling them immediately because doing so would result in capital losses due to price fluctuations over time.

SEBI has made it mandatory for brokers to collect a 20% delivery margin on every share transaction. This rule is also applicable to intra-day trading and futures trading.

The delivery margin is a fixed amount that you need to pay at the time of buying shares from your broker. In other words, it does not apply to stocks that you hold in your Demat account (such as mutual funds). It is only applicable to stocks that want to be sold and delivered by their respective brokers.

To understand how delivery margin works, let us look at an example:

●      Before peak margin, you received a 100% sale benefit the same day you sold any shares that anyone could use to buy more stocks using the sales credit.

●      Explanation: On Day 1, you traded shares of ABC Ltd. valued at Rs. 1,000,000. As a result, you received Rs 1,000,000 in Sale Benefit, which you can use to purchase additional stock.

●      When you trade any shares today, after the peak margin, you get an 80% sale incentive the same day. After deducting all due amounts, the remaining 20% will be blocked as a delivery margin and credited to your Demat account on the subsequent trading day.

This difference in the amount is called the delivery margin, which happens before and after the peak margin.

In case a broker does not follow this rule, he can be penalised by SEBI.

If a broker does not follow this rule, he may face a fine of up to Rs 10 lakh or more from SEBI.

There are several things that you need to know about delivery margin and how it works. Here’s an overview:

●      Delivery Margin means the difference between what you pay for buying shares and what you get them sold for (needless to say, this amount is also known as “commission”). It represents your profit/loss on each trade made by your brokerage company.

●      It is a safeguard so that you don’t run into any financial fiasco while trading and have no money left over to pay for the traded stocks or the loss.

Important points about delivery and trading

These are some summarised points from the above discussion about the delivery margin:

●      You can find out the delivery margin component applicable to every stock by going through the contract note provided by your broker.

●      The delivery margin is the only amount that you have to pay at the time of buying stocks from your broker. It is also called a brokerage charge, deposit or commission.

●      Delivery margin is calculated based on how much money you want to invest in your portfolio and how much profit/loss you would like to earn on that particular stock. So, if someone wants to invest Rs. 10 lakhs, he will be charged around 20% of his investment amount as delivery margin (Rs. 2 lakhs).

●      Delivery margin is only applicable on stocks that you hold in your Demat account. This means that it will not apply to shares that you have sold to the broker or any other person.

Conclusion

This comprehensive guide on delivery trading was meant to clear any doubts that one may have about margins for delivery trading in the simplest language using the appropriate examples and definitions. You must be clear about the delivery margin after reading this piece, and if you want to read more articles on finance, you should read more finance-related articles on Piramal Finance for any type of information related to loans or investments.