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I see a Nudge on Zerodha saying margin penalty may apply for BTST. What does this mean?

Click here to check the list of stocks where an ad-hoc margin is currently applicable. 

As per the upfront margin rules, if you execute a trade without maintaining adequate margins in your account then a margin penalty may be levied on you. The margin collected can be in form of either funds or securities and for equity delivery transactions is 20% of the trade value in most cases.

Before we talk about the scenario where margin penalties may be applicable for BTST (Buy Today Sell Tomorrow) transactions, let's understand with help of an illustration how the upfront margin requirement is fulfilled in these transactions. 

Assume you have Rs. 10,000 in your trading account. On Monday, you bought 5 shares of Reliance at Rs. 2000 and on Tuesday you sold the 5 shares at Rs. 2100 each.

Buy Value = Rs. 10,000/-

Sell Value = Rs. 10,500/-

Margin required for buy transaction = 20% of Rs. 10,000 = Rs. 2,000/-

Margin required for sell transaction = 20% of Rs. 10,500 = Rs. 2,100/-

The Rs. 10,000 in your account is blocked immediately on Monday towards the purchase of Reliance shares. This is settled to the exchange on Wednesday (T+2 day). In the meantime, it can be considered as margin collected for your trades. On Monday the margin required is Rs. 2,000/- and on Tuesday it is Rs 4,100/- (i.e. 2000 + 2100). 

In some cases, the exchange may levy additional margin requirements for some shares in form of an ad-hoc margin. If the ad-hoc margin is higher than 30%, the overall margin required for a BTST trade will exceed the funds blocked from your account for the original purchase. 

In the above example, assume an ad-hoc margin of 40%. Then, 

Margin required for buy transaction = 60% of Rs. 10,000 = Rs. 6,000/-

Margin required for sell transaction = 60% of Rs. 10,500 = Rs. 6,300/-

The overall margin required on Tuesday will be Rs. 12,300 (60% of 10,000 + 60% of 10,500). If you only had Rs. 10,000 in your account when you purchased the Reliance shares, your available margins will be inadequate on Tuesday after selling and a penalty may be levied on you. The penalty amount depends on the amount of shortfall. Learn more.