Normally to buy and sell shares, you need to have the money to pay for your purchase and shares in your demat account to deliver for your sale. However as you do not have the full amount to make good for your purchases or shares to deliver for your sale you have to cover (square) your purchase/sale transaction by a sale/purchase transaction before the close of the settlement cycle. In case the price during the course of the settlement cycle moves in your favor (risen in case of purchase done earlier and fallen in case of a sale done earlier) you will make a profit and you receive the payment from the exchange. In case the price movement is adverse, you will make a loss and you will have to make the payment to the exchange. Margins are thus collected to safeguard against any adverse price movement. Margins are quoted as a percentage of the value of the transaction.
Important facts for NRI customers:
Buying and selling on margin in India is quite different than what is referred to in US markets. There is no borrowing of money or shares by your broker to make sure that the settlement takes place as per SE schedule. In Indian context, buying/selling on margin refers to building a leveraged position at the beginning of the settlement cycle and squaring off the trade before the settlement comes to end. As the trade is squared off before the settlement cycle is over, there is no need to borrow money or shares.
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