What is Margin Shortfall?

The use of MTF (Margin Trading Facility) in the stock market allows traders to make large deals with less capital. But the most important thing is to understand margin shortfall. This happens when the margin available in your account falls below the minimum limit. In such a situation, margin shortfall penalty may be imposed and your position may be affected. In this blog we will know what is margin shortfall, its reasons, shortfall rec meaning and easy ways to avoid it.

What is Margin Shortfall? 

Margin Shortfall occurs when the available margin in your account falls below the minimum required margin set by the brokerage. This can happen due to a variety of reasons such as a fall in stock price, a rise in haircuts, or both. Let’s understand this with some examples.

Margin Shortfall = Required Margin – Available Margin

Suppose you took a delivery trade at a pocketful and the brokerage gave you margin benefit. Now if the market suddenly falls and the value of your holdings decreases, the available margin in your account will go below the required limit.

For example

Situation	Value
Required margin	₹1,50,000
Available Margin	₹1,12,500
Margin Shortfall	₹37,500

In this case, the brokerage will send you a margin call, requesting you to add funds by a specified time. If you do not add the funds on time, the brokerage can square-off your position or charge a penalty.

Common Scenarios of Margin Shortfall

The formula to calculate the margin shortfall is given below:

Margin Shortfall = Required Margin – Available Margin 

For example:  A trader buys 100 shares of ABC at ₹1500 per share. Total investment is equal to ₹1,50,000. We are assuming a haircut of 25%. So, you need to deposit ₹37,500 to start a position and the rest (₹1,12,500) is funded by the broker. Now we will look at different scenarios.

Case 1: When the stock price falls to ₹1200 (20% drop)

• New Position Value = ₹1200 * 100 = ₹1,20,000
• Required Margin = 25% of 1,20,000 = ₹30,000
• Available Margin = Original Margin – MTM Loss = ₹37,500 – ₹30,000 = ₹7,500
• Margin Shortfall = Required Margin –  Available Margin = ₹30,000 – ₹7,500 = ₹22,500

Case 2: Haircut increases from 25% to 35% and no change in stock price

• New Position Value = ₹1,500 * 100 = ₹1,50,000
• Required Margin = 35% of 1,50,000 = ₹52,500
• Available Margin = Original Margin – MTM Loss = ₹37,500 – ₹0 = ₹37,500
• Margin Shortfall = Required Margin –  Available Margin = ₹52,500 – ₹37,500 = ₹15,000 

Case 3: Price declines from ₹1,500 to ₹1,200 + Haircut increases from 25% to 35%

Situation:

• New Position Value = ₹1,200 * 100 = ₹1,20,000
• Required Margin = 35% of 1,20,000 = ₹42,000
• Available Margin = Original Margin – MTM Loss = ₹37,500 – ₹30,000 = ₹7,500
• Margin Shortfall = Required Margin –  Available Margin = ₹42,000 – ₹7,500 = ₹34,500 

Use our Margin Trading Facility Calculator

Types of Margin Shortfall

Margin shortfall in trading occurs when your trading account has less balance than the required amount. This can happen at different times and circumstances. Let us understand its three main types

1. Initial Margin Shortfall

When you take a new position and your account does not have the initial margin (i.e. the amount required to start the trade), it is called initial margin shortfall.

Example: If a futures contract requires ₹1,00,000 margin and you have only ₹90,000, it is an initial margin shortfall.

2. Maintenance Margin Shortfall

After taking the position, if the market price moves against you and the balance goes below the maintenance margin, it is called maintenance margin shortfall.

Example : You opened a position with a margin of ₹1,00,000, but due to price fall your balance became ₹70,000 while maintenance margin is ₹75,000, then it will be a shortfall.

3. Difference between the two and brokers’ behavior

In initial margin shortfall usually the order is not executed or there is a demand to add funds immediately. In maintenance margin, shortfall brokers give you time to add funds, and if the funds do not come on time then the position can be squared off.

Read Also: What is Stock Margin?

Regulatory Framework Around Margin Shortfall

1. SEBI rules : SEBI has made clear guidelines for MTFs. According to the rule, the investor is required to maintain a minimum margin to buy shares, which can be in cash or permitted securities. If it goes below the prescribed limit, it is called margin shortfall.
2. Role of stock exchange : NSE and BSE take margin reports from brokers daily and take action in case of shortfall. The broker may also be penalized for not updating the margin on time.
3. Daily reporting and settlement : At the end of every trading day, the broker has to send the client’s margin status to the exchange. Settlement of shares in MTF takes place in T+2 and the margin should be complete during this time.
4. Margin call and notification : When the margin decreases, the broker sends a notification to the investor so that additional margin can be deposited in time and square-off can be avoided.
5. “Shortfall REC” and recovery : This means shortfall recovery. In case of non-payment of margin on time, the broker can recover the dues by selling the holding or by other means so that discipline is maintained in the system.

Risks of Ignoring Margin Shortfall

1. Forced Square-Off : If you don’t cover your shortfall in time, your brokerage (like Pocketful) can force your position to close as per SEBI regulations. This is called forced liquidation or square-off. This can force you to close your position at a loss in weak market conditions.
2. Escalating Penalties : In MTF, the broker imposes a penalty on margin shortfall, and if this shortfall is high or happens repeatedly, then the penalty rate can also increase. In the beginning, this rate is relatively low, but it becomes quite high if the shortfall persists continuously.
3. Possible Suspension from MTF : In case of frequent or large shortfalls, the broking house may temporarily suspend your MTF facility. This means that you will not be able to make margin-funded trades next time until the shortfall is made up. Your liquidity and trading flexibility may be disrupted.
4. Broker Relationship Impact : Frequent shortfalls may make the brokerage feel uneasy about you; you may not be able to avail special MTF facilities in the future. While this may not directly impact your credit score (like CIBIL), it does impact your breaking relationship and convenience.

Check Out – Stocks Available for MTF

How to Avoid Margin Shortfall in MTF

It is very important to avoid margin shortfalls while trading in Margin Trading Facility (MTF) as it not only leads to penalties but also the brokerage can forcefully square off your position if required. With proper planning, caution and timely monitoring, this risk can be easily minimized.

Smart risk management tips:

1. Keep extra margin buffer : Don’t make the mistake of trading on just the minimum margin. Always keep some extra margin so that you don’t shortfall in case of a sudden fall in the market.
2. Check positions daily : Monitor your MTF portfolio, margin utilization and collateral value daily.
3. Avoid over-leveraging : Take as much leverage as you can handle. High leverage multiplies the impact of market volatility.
4. Adopt diversification : Don’t invest all your funds in a single stock or sector. Investing in different sectors reduces risk.
5. Leverage technology : Keep an eye on real-time margin updates and price movements through Pocketful mobile apps. Keeping alerts on allows immediate action when needed.
6. Always keep liquidity ready : Maintain some cash or liquid securities in your trading account so that you can top up quickly in case of a margin call.

Conclusion

Margin shortfall occurs when the funds in your account are not sufficient to maintain your open positions. An easy way to avoid this is to check your margin balance daily and deposit funds immediately when needed. It is also better to keep a little extra margin buffer so that your positions remain safe even in case of sudden changes in the market and you do not have to face problems like penalty or forced closing.

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