Margin Shortfall Explained: What It Is, Why It Happens & How to Avoid It?6 min read
Have you ever run low on balance in your UPI wallet right when you’re about to pay for something important? That little stress of “oh no, not enough funds” — that’s kind of what a margin shortfall feels like in trading.
Only here, we’re not talking about buying snacks or tickets — we’re talking about investing in stocks using borrowed money, through Margin Trading Facility (MTF).
Let’s break it down, simply and seriously — because if you’re trading with margin (or planning to), understanding margin shortfall is a must.
So… What is Margin Shortfall, Really?
When you buy stocks using MTF, you don’t pay the full price upfront. Instead, you pay a part of it — called margin — and your broker (like Paytm Money) covers the rest.
In return, you need to keep a minimum amount of money or collateral value in your account at all times. If your margin falls below this required level, you get what’s called a margin shortfall.
It’s just a way of saying:
“Hey, your balance isn’t enough anymore. You either add more funds or risk your stocks being sold.”
How Do I Know If I Have a Margin Shortfall?
You’ll usually be notified — through an app alert, message, or email.
But even before that, there are signs:
- Your stock value is dropping.
- You used a lot of margin, and the market turns.
- Your margin percentage looks close to the minimum in the app.
On Paytm Money, you can always check your Margin Requirement — a quick look will show you how close you are to a shortfall.
Understanding Margin Shortfall with Real Examples
Let’s say you use MTF to buy a stock worth ₹10,000. Paytm Money asks you to pay 25% margin — that’s ₹2,500. The rest ₹7,500 is funded for you.
Now, here’s how margin shortfall can happen:
Case 1: Stock Value Drops
Let’s say you use MTF to buy 10 shares of a stock priced at ₹1,000 each.
- Total cost = ₹10,000
- Margin required = 25% = ₹2,500
- You pay ₹2,500
- Paytm Money funds the remaining ₹7,500
Now, suppose the stock price falls from ₹1,000 to ₹900. Your 10 shares are now worth ₹9,000 instead of ₹10,000.
But here’s the issue: the loan portion (₹7,500) hasn’t changed — you still owe that.
The value of your holdings has dropped, so your margin coverage (your part of the deal) is now lower.
Let’s check the math:
- Your stock is now worth ₹9,000
- 25% margin on ₹9,000 = ₹2,250
- You had ₹2,500, so technically, you’re still okay — but if the stock drops just a bit more to ₹880, your required margin becomes ₹2,200, and your margin coverage may dip below the safety threshold once interest and charges are added.
👉 This is where you can slip into a shortfall without even noticing. The more the stock price falls, the more likely you are to get a margin call.
Takeaway: Even a mild fall in stock price can disturb your margin ratio, especially when you’re using borrowed funds. You must monitor your stock value regularly if you’re using MTF.
Case 2: Haircut Increases
First, what’s a haircut?
It’s the percentage your broker subtracts from the stock’s value to stay safe from market swings.
Now imagine nothing happens to the stock price — it stays at ₹1,000 per share. You still hold 10 shares worth ₹10,000.
However, the exchanges decided to revise the haircut on that stock from 25% to 30%. (Haircuts are adjusted based on how risky or volatile a stock becomes.)
Here’s what changes:
- Earlier, with a 25% haircut, the usable value of your stock = ₹7,500
- Now, with a 30% haircut, usable value = ₹7,000
So suddenly, your broker sees less value in your holdings as collateral.
Now let’s say your borrowed amount is ₹7,500 — but the usable value of your stock is only ₹7,000. That’s a ₹500 gap. You’ve entered margin shortfall territory, even though the stock price hasn’t moved at all.
👉 Haircut changes are not in your control, but they directly affect how much margin you need to maintain.
Takeaway: You must stay updated about haircut percentages — especially during volatile markets. Brokers can tighten rules overnight to protect themselves, and that affects you too.
Case 3: Stock Falls + Haircut Increases
This is the most dangerous scenario — a double hit.
Let’s go back to our example:
- You bought 10 shares at ₹1,000 = ₹10,000
- Paid ₹2,500 (25% margin)
- Borrowed ₹7,500
Now:
- Stock drops from ₹1,000 to ₹900
- Haircut increases from 25% to 30%
Let’s calculate:
- Value of holdings = ₹9,000
- Usable value (after 30% haircut) = ₹6,300
- You still owe ₹7,500
So your broker is now exposed — your stock no longer covers the borrowed amount.
You’re short by ₹1,200 (₹7,500 – ₹6,300). This triggers a serious margin shortfall.
If you don’t respond quickly, Paytm Money might:
- Send a margin call, giving you a few hours to add funds
- If you ignore it, they may auto-sell your stock by T+5 days, possibly at a loss
- You could lose control of your trade and damage your portfolio
👉 This situation can happen during sudden market crashes, earnings misses, or any news that spikes volatility. Even safe-looking positions can become risky when two factors change at once.
Takeaway: The combination of stock price drop + haircut change can be rare but dangerous. Always keep extra margin buffer in such positions to avoid liquidation.
What Happens If I Ignore a Margin Shortfall?
It’s not a good idea to let it slide.
Here’s what can happen:
- You’ll get a margin call — a message asking you to add funds quickly.
- If you don’t respond in time, your broker might sell some of your stocks to cover the gap.
- You might also pay interest or penalties for not maintaining the margin.
- Worst of all — your position may be closed at a bad price, not on your terms.
How to Avoid Margin Shortfall?
A little caution goes a long way.
✅ Don’t use 100% of your margin power. Keep a buffer.
✅ Track your stock prices and check the margin tab regularly.
✅ Stay updated on any haircut changes for your stocks.
✅ Set alerts for major drops.
✅ Avoid holding volatile stocks with borrowed funds unless you’re sure about the risks.
What Usually Causes Margin Shortfall?
- Falling stock prices
- Sudden haircut increases
- Holding very volatile stocks
- Not adding margin in time
- Using maximum available margin without backup
- Corporate Action like Merger/Demerger
Sometimes, it’s just market movement. Other times, it’s avoidable with better planning.
In Conclusion: Be Smart with Margin
Margin shortfall isn’t something to panic about — but it is something to pay attention to.
Think of it as a warning light in a car. You can’t ignore it. You have to slow down, check what’s going wrong, and fix it before it causes damage.
If you’re using MTF on Paytm Money, you’ve got tools, alerts, and support. Use them. Check your margin health regularly and only take positions you’re comfortable managing — even when the market moves fast.
Smart traders don’t just look for returns — they also protect their positions.
And avoiding margin shortfall is one of the best ways to do that.
