Margin money: How much is good enough?

Day traders in the stock markets are often faced with the question: How much margin money should I deposit with the broker? Well, that depends on four factors which every individual investor has to take into account while deciding on the suitable amount of margin money. Let us look at these four factors.

Availability of spare cash: This, of course, is the basic thing one needs to look at to begin with. The availability of spare cash will determine the margin money one can deposit with the broker. One investor may have spare cash of just Rs 10,000, while another investor may have spare cash of Rs 5 lakh or even Rs 10 lakh. So, one needs to decide on the margin money depending on one’s liquidity position.

Experience: If you are new to equity investing, you would not want to put a whole lot of money on the line, even if you have good amount of spare cash in your hand. You would want to begin with a small amount and try your luck dabbling in the stocks. If it works out well and you gain confidence, you can increase your exposure to the stocks by depositing more margin money. However, if you have high level of experience in stock market trading, you might want to go the whole hog and deposit a higher amount of margin money to be able to trade aggressively.

Risk Appetite: If you are a risk-averse investor, you would not want to put too much of your money at risk, so you would deposit a small amount with your broker as per your risk appetite. However, if your risk appetite is high and you have sufficient amount of money in your hands, you can deposit the entire money as margin with your broker and trade aggressively.

Number of stocks: The number of stocks that one wants to trade in will determine the total margin money that one would be required to deposit with the broker. So, if a trader wants to place orders for 4 stocks, the margin money requirement would be lower than one who wishes to trade in 10 stocks, assuming the level of exposure in each stock is the same.

Level of exposure: The level of exposure that one wants to take in each stock will also determine the margin money required to be deposited. If the level of exposure is higher in each stock, the margin money required would be higher. For example, buying 10 shares of TCS would require lesser amount of margin money than buying 50 shares of TCS.