Margin trading “margin” explains investment risks and how to deal with them

If cash stocks are added to the portfolio and operations have stabilized to some extent, the next entry candidates may include stock margin trading and stock index futures trading. When starting these transactions, it is important to understand the difference from spot trading, and especially the mechanism called “margin”.

Margin trading means that additional deposits are required when the maintenance rate of the security deposit falls below the specified value in investments that use security deposits as collateral, including margin trading, futures trading, and FX. This has a property similar to “debt repayment” and has a large impact on investment profit and loss, so it is essential to learn accurate knowledge.

Therefore, in this article, we will introduce the mechanism of marginal proof, the occurrence situation, and how to deal with it.

1. Margin is “additional deposit of consignment security deposit”
2. Characteristics of “margin trading” where margin calls occur
3. Mechanism of “marginal deposit” closely related to margin call
4. Examples of cases where margin call occurs
5. What to do in the event of a margin call
6. How to avoid the risk of margin call/a>
7. Efficient asset management by avoiding margin calls

1. Margin is “additional deposit of consignment security deposit”

First, let’s give a brief overview of endorsements.

1-1. Outline of margin call

Margin is an abbreviation of “additional margin”, and in transactions where customer margin, etc. is used as collateral, the customer margin rate falls below the maintenance rate set by each securities company due to unrealized losses in the brand or a drop in the price of the underlying stock used as collateral. It occurs when In the event of a margin call, additional collateral must be deposited or the relevant open interest must be settled.

The due date for the margin call is set individually by each securities company, but generally it is necessary to make the deposit by the next business day or the day after the next business day. Please note that if the margin call is not canceled even after the deadline, all open interest will be forcibly settled.

Also in virtual currency trading, there is a margin call system for transactions that use margin as collateral, such as virtual currency FX.

1-2. Difference between margin call and loss cut

The system that is often confused with margin call is “loss cut”.

Loss cut is a system that automatically settles open interest. When the loss limit amount set in advance is reached, the purpose is to force liquidate the open interest and prevent the loss from expanding.

Margin calls, on the other hand, require additional margin deposits on the condition that the loss on the open interest held exceeds a certain level. This is an emergency measure when losses become large, and you can maintain your open interest by adding margin.

Margins can be canceled by settlement of open interest, and if they are not canceled, they will be forced to settle. Let’s understand one thing.

2. Features of Margin Trading with Margin

Next, I will explain the characteristics of transactions that generate margin calls.

2-1. It is possible to trade more than own funds

In margin trading, stock index futures trading, and margin trading such as FX, it is possible to trade an amount that exceeds your own funds using leverage (the principle of leverage).

For example, in margin trading, it is possible to trade about 3.3 times the deposited security deposit. In other words, if you use a security deposit of 1 million yen as collateral, you can trade up to 3.3 million yen.

In Forex, there are even exchanges that allow you to set leverage of “25x” in Japan and “unlimited” overseas. The greater the leverage, the greater the risk of incurring losses, but on the other hand, it is attractive that you can aim for a large return even when the capital is small.

In this way, the biggest feature is that you can trade with an amount that exceeds your own contribution and improve the efficiency of funds.

2-2. In some cases, securities can be used as collateral

In addition, in margin trading of stocks, securities such as physical stocks and bonds may be used as security deposits, and this system is called “securities in lieu of money”.

However, since securities in lieu of money have a higher risk of price fluctuations in the security deposit itself than cash, each securities company sets a haircut (multiplying the collateral value by a certain percentage and evaluating the collateral amount up to that amount). .

For example, let’s assume a case where a stock with an appraisal value of 1 million yen is used as a substitute security. If a haircut of 80% is set for the shares, the appraisal value of the security deposit will be 80% of 1 million yen, or 800,000 yen.

If you have stocks that are salted, you may want to consider the option of using them as collateral securities.

2-3. Trading “short” from selling is possible

As a big difference from spot trading, it is possible to sell from selling to trading “short (short selling)” in margin trading etc. Shorts can earn profits even in a falling market by buying a short position first and buying it back when the price drops.

In spot trading, including stocks and virtual currencies, the main method is to aim for profits by buying when the price is low and selling when the price is high. Is difficult.

In this regard, if you combine short trades, you can actively aim for profits in both rising and falling markets, and you can secure more trading opportunities.

3. Mechanism of “marginal deposit” closely related to margin call

Now that you understand the characteristics of transactions that generate margin calls, let’s explain the mechanics of margin calls in more detail. Factors that determine the occurrence of margin calls include the “margin deposit rate” and the “margin deposit maintenance rate.”

3-1. What is consignment deposit rate?

Brokerage deposit ratio means the ratio of the brokerage deposit that an investor deposits with a securities company to the contract price.

The consignment deposit rate is stipulated by law as 30% or more of the contract price and the amount is 300,000 yen or more, and if it is higher than that, it can be set at the discretion of each securities company. In fact, when the market heats up or due to margin trading regulations for individual issues, the brokerage deposit rate of the securities company may change.

As a general rule, investors are required to deposit a security deposit by “noon on the third business day” counting from the contract date.

3-2. What is the security deposit maintenance rate (minimum security deposit maintenance rate)?

The customer margin maintenance rate is the ratio of the customer margin required to maintain open interest in margin trading, and is also called the “minimum margin maintenance rate.”

The customer margin maintenance rate is directly related to the occurrence of margin calls, so it is a factor that must always be paid attention to when performing margin trading.

As a concrete mechanism, first of all, when a valuation loss occurs on a position, the loss amount will be deducted from the consignment deposit. A decrease in the security deposit directly leads to a decrease in the security deposit maintenance rate, and if it falls below the minimum maintenance rate, a margin call will occur.

Once a margin call has occurred, it will not be automatically canceled even if the security deposit maintenance rate recovers thereafter. It is necessary to compensate for the incurred amount or settle the unrealized open interest.

The security deposit maintenance rate is determined at the discretion of the securities company, but it is usually set at a lower rate than the customer security deposit rate. For example, in the case of a securities company that sets the customer deposit rate at 30% or higher, the customer deposit maintenance rate is often set at around 25%.

As described above, if the margin deposit rate is 30% and the margin maintenance rate is 25%, margin call will occur when the amount of margin deposit falls below 25% of the open interest valuation. It is necessary to deposit an additional deposit in the amount that restores the consignment deposit maintenance rate to 30%.

As mentioned above, the amount of consignment deposit is stipulated to be 300,000 yen or more, so if the amount of consignment deposit is less than 300,000 yen, the necessary amount of additional security deposit will be required regardless of the percentage of the open interest valuation. I have to make a deposit.

4. Examples of cases where margin calls occur

Next, I will introduce a specific case of the situation in which additional proof occurs.

4-1. Fall in substitute securities

This is a case where a margin call occurs due to a decline in the valuation of the securities when using collateral securities as collateral for the security deposit.

As mentioned above, there is a high risk of fluctuations in the valuation of securities in lieu of securities because they are collateralized by the stocks, etc. held. Therefore, even if the margin trading itself is profitable, please understand that there is a risk that the margin maintenance rate will fall below the minimum line due to the drop in the margin rate and the margin call will occur.

4-2. Falling open interest

A more common cause of margin calls is that the open interest has been written down.

As mentioned above, the loss on valuation of open interest is compensated by the customer deposit, and if the customer deposit maintenance rate falls below the minimum line, a margin call will occur.

As an example, let’s assume that a brokerage firm with a minimum margin maintenance rate of 25% and a minimum margin margin rate of 30% trades a long position with an appraisal value of 4.5 million yen in cash with a margin of 1.5 million yen.

If the open interest loses 450,000 yen, the same amount will be deducted from the customer deposit and the customer deposit will decrease to 1,050,000 yen, and the customer deposit maintenance rate will drop to 23.3%. If you fall below the minimum security deposit maintenance rate of 25%, a margin call will occur, and if you want to maintain the open interest, you will need to make an additional deposit of 300,000 yen in cash up to the minimum security deposit rate of 30%.

5. What to do in the event of a margin call

So far, we have introduced the situations in which additional certification occurs. Next, I’ll show you how to deal with it when it actually happens.

If margin call occurs, it is necessary to return to the minimum line of the consignment deposit rate. However, keep in mind that if a margin call occurs, the valuation of the open interest will rise and even if the margin maintenance rate exceeds the minimum line, the margin call will not be canceled.

5-1. Add security deposit

If a margin call occurs, the way to deal with it is to add cash.

Since it is necessary to restore the consignment deposit rate to the minimum line, we will deposit the difference in cash such as transfer from a bank account.

The cancellation deadline for margin calls differs depending on each securities company, but it is common for companies to set two stages of cancellation deadlines according to the maintenance rate, with a maximum of “until the next business day” required.

The two-stage cancellation deadline is, for example, if the security deposit maintenance rate is less than 25%, it will be canceled by the next business day, and if the maintenance rate is below 20%, it will be canceled by the next business day. It is an image of becoming.

5-2. Settle open interest

In addition to adding a security deposit, “settlement of open interest” can be cited as a method of canceling the margin call.

After the open interest is settled, 20 to 30% of the settlement amount will be compensated as the margin margin amount, and the margin margin will be canceled. The percentage of the settlement amount that is used for margin call is set at the discretion of the securities company.

For example, if you are using a securities company that uses 30% of the open interest settlement amount to supplement the margin call, assume that a margin call of 180,000 yen has occurred. In this case, in order to compensate for the margin call of 180,000 yen, it is necessary to settle the open interest of 600,000 yen or more (30% of 600,000 yen is 180,000 yen).

6. How to avoid the risk of margin call

Margin calls can be eliminated by the above methods, but it is extremely important to take measures to reduce the risk of occurrence in the first place. Specific methods include the following.

1. reduce leverage
2. Deposit a cash security deposit with sufficient margin
3. Determine loss cut level
4. Avoid “Two Tiers of Credit”

First of all, it is important to set a low leverage rate. If the leverage rate is high, even a small price change may result in a margin call, so be careful.

In addition, it is also effective to deposit “cash” as a security deposit. In the case of securities in lieu of collateral, there is a risk of additional collateral due to a decrease in the valuation of the collateral securities.

In addition, clarify the loss cut rules in advance, and set up reserve orders for loss cuts such as limit and stop orders. Margin will not occur if loss cut is executed within the range not below the consignment deposit maintenance rate.

Finally, avoid “two tiers of credit”. Credit two-tier is to pledge the actual stock as collateral and buy the same issue on margin. With this method, when the stock price of cash stocks falls, losses also occur in margin trading, so losses tend to swell rapidly. This also means that there is a double margin risk, so it is safer to avoid it for stable operation.

7. Efficient asset management by avoiding margin calls

Margin trading allows you to trade an amount that exceeds your own funds, so it is very attractive that you can invest with increased profit efficiency, but on the other hand, be careful of the risk of margin call.

Although there are similarities with high volatility cryptocurrency investments, there are cases where losses exceed the amount invested in margin trading, so it is necessary to carefully select stocks and set leverage rates.

Let’s establish an investment method that can maximize the benefits of margin trading with the correct knowledge of margin trading.

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