We all must have found an exciting offer at some point but had to stand back and think about it for a considerable amount of time. So, what would be our plans? The first option that would come to our mind would be to pay it from our own pockets. However, there are two issues with this solution. First, what happens when we do not have enough funds in our DEMAT account? It will take time to get funds. However, by the time we get enough funds, the bargain will have expired. And second, it will enhance the overall market risk exposure. But if our broker offers a margin, there is another way to solve the situation.
So, what is that unique facility that experienced traders are familiar with and use to leverage in the market? The answer is margin against shares. A person now might have a question in mind, i.e., what exactly is a margin against shares in the share market? It is a financing facility provided by our broker as an additional service to assist us in our investment with them. We can overdraw our DEMAT account to pay the margin and realize profit without increasing our risk quotient when there is a good bargain in the share market. The broker uses the stocks as collateral and lends us money to trade for a limited time.
Margin against shares in the share market is like a loan against shareholding that a stockbroker offers at an agreed interest rate for trading reasons. A share broker provides this as a value-added service. Because margin against shares carries a higher risk, only a few stockbrokers in India offer it.
This service allows clients to obtain margin funding for trades by using shares in their Demat account. Collateral Margin is the term for it.
Demat account holders are entitled to collateral margins if they meet a specific condition: they must keep a specified proportion of the collateral’s value as a cash margin.
Many brokers make this service available to their clients. The facility benefits both a brokerage and an investor. The amount of margin offered to an investor is determined by subtracting the haircut from the current market price of the pledged stock. The haircut is the amount that compensates a broker for the chance that the collateral share prices would fluctuate wildly. The quantity of the haircut is calculated as a percentage.
Only a few brokerage firms in India provide collateral margins. This is due to the significantly high risk involved with the process. Many investors also fail to keep the cash–collateral ratio in check, an essential and most important requirement for receiving a collateral margin. The cash–collateral position is calculated in a 10:90 ratio in a client’s account.
If someone is interested in a margin against shares, they first need to check with their broker to see if margin against shares (MAS) is available as a value-added service.
Margin against shares works in the following way:
The ownership does not change when shares are invested or used for margin against shares. The client still owns the shares in the margin account. If the client continues to meet their obligations, like paying interest, they can use the margin for as long as they choose. When a shareholder sells shares from their margin account, the proceeds are sent to their broker, who will alter the margin amount.
There are a few more considerations to consider while using margin against shares. You should keep a few more things in mind while any investor uses margin against shares. All securities cannot be used as margin collateral. Only particular securities can be used as margin collateral. An investor should keep the ready list with them, which the brokers should provide to the investors.
How much is the margin against shares?
When they apply for a loan against the stock, the broker will advance the funds after deducting the exchange-approved haircut.
Furthermore, employing 100 percent of the margin for a trade is prohibited by the exchange. The cash collateral ratio has been established at 50:50, which means that only 50% of the total deal volume can be paid using margin, with the remaining amount requiring new cash investment.
Let us now look at an example to understand the situation better; an investor/shareholder wishes to buy NIFTY Futures worth Rs 3,14,120. To make an order for the deal, they must pay Rs 1,57,060 in cash, which is 50% of the total deal value, before paying the remaining amount with a margin against shares.
The cost of borrowing includes interest and Demat pledge/unpledged fees, which can be considered an additional charge.
Interest is calculated at a rate of about 0.05 percent every day. The cost of pledging and unpledged shares is roughly 50 rupees per script.
After the haircut amount is exchanged, the client receives a margin against the shares.
The haircut is the percentage amount used to cover the risk of stock price fluctuations. The stock market always specifies the haircut, and it remains the same for all brokers.
For example, if a client transfers shares valued at Rs 1 lakh and the exchange requires a 15% haircut, the shares’ collateral value will be Rs 85,000. In the customer’s account, the Cash-Collateral proportion for the position held by the client will always be calculated in the ratio of 10-90. As a result, to take advantage of the total Rs 85,000 collateral benefit, the client must have a minimum cash margin of Rs. 9444 (Rs. 85000 * 10/90).
While there are numerous advantages to opening a margin account, it’s also vital to thoroughly comprehend the dangers before proceeding. Before we go into the risks, let’s look at the main advantages of employing margin.
This method is beneficial if an investor has a substantial unrealized capital gain that they wish to maintain.
However, an investor should never forget that where there is a chance of such rewards and potential, there is a high chance of risk.
Now that we have learned about the details of margin against shares, the calculations, the benefits, the risks, and how to maintain those risks, we hope that any investor finds it easy to invest. An investor should never forget that margin against a share in a facility increases their investment capacity; a line of credit from their broker allows them to trade for more significant stakes. They can hedge their net risk meter by pledging their current stocks and ETFs as collateral. However, it is a two-edged blade that one must use with care.
Margin against share is a loan against shareholding that a stockbroker offers for trading at an agreed interest rate. The share broker provides this as a value-added service. Because margin against shares carries a higher risk, only a few stockbrokers in India offer it.
If someone is interested in the margin against shares option, they would first need to check with their broker to see if margin against shares (MAS) is available as a value-added service.
An investor should never forget that where there is a chance of such rewards and potential, there is a high chance of risk.
An investor should make sure that they regularly pay interest; Interest costs are added to the account every month, so it's a good idea to pay them off before they become unmanageable.
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