Published on Wednesday, February 18, 2015 by Chittorgarh.com Team | Modified on Tuesday, August 21, 2018
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Margin against share is a loan against share an agreed interest rate offered by your stockbroker for trading purposes. It is a value-added service provided by the share broker. This service offers the client to use shares in their demat account to get the margin funding needed for trade. It’s known as Collateral Margin.
Very few stockbrokers in India offer this product as there is a higher risk associated with it.
Margin against share doesn't cover 100% of the margin. Brokers have the "Cash-Collateral proportion" which client has to maintain. The ratio of Cash-Collateral Proportion varies by the trading segment (Delivery, Intraday etc.), share category (A, B, C, D, Z) and the broker rules.
The amount of margin made available is calculated by reducing 'haircut' from the current market price of the equity share. The haircut is an amount in % which covers the risk for the broker in case collateral shares prices moves unexpectedly. For example; for Reliance Industry share the haircut is 20%. This means you get the loan up to 80% of your Reliance Industry shares.
In F&O segment; for Mark to Market losses, customers need to have cash margin. Fail to provide the cash margin leads to sell off the stocks he kept for margin to settle the obligation.
Margin against share is the service provided by the broker to its customers who hold shares in their demat account for long-term investment and would like to use them as collateral for the loan. The customer could use these idle shares as an asset (similar to cash) so that broker could give margin against such assets for the client to trade at an agreed interest rate. Most broker charges 0.05% interest rate per day for the loan against shares.
In simple words, if the customer is out-of-money in the trading account or needed immediate cash for trading, he could use shares and get margin needed for trading.
Here are few more benefits of using shares as margin for trading:
The broker gives margin to its customers for the securities held by the client in their demat account. Here are the steps about how collateral margin works:
Yes, Interest for loan and demat pledge/unpledged fee is the cost of borrowing.
Interest is charged at around 0.05% per day. Pledging and unpledging the shares cost around 50 rs per script.
Note that all the corporate action benefits like Dividend, Bonus, Rights Issue, etc shall accrue to the client and not to the broker since the client continues to be the end beneficiary of the shares.
The client gets margin against the shares after the exchange prescribed haircut.
The haircut is the amount in % to cover the risk due to price fluctuation of the stock. Stock exchange prescribed the haircut and its same for all brokers.
Say for an example, if the client has transferred shares worth Rs 1 lakh and if the exchange prescribed haircut is 15%, then the collateral value of the shares will be Rs 85,000.
The Cash-Collateral proportion in clients account for the position held by the client will always be calculated in the ratio of 10-90. Accordingly, to utilize the entire Rs 85,000 collateral benefit client will need to have a minimum cash margin of Rs. 9444 (Rs. 85000 * 10/90).
Many brokers in India offers margin against share facility. Here are some of them:
SAMCO, the Mumbai based discount stock broker offers a variety of leverage products.
Read detail about SAMCO Margin Funding - CashPlus, StockPlus & IntraPlus Explained
Zerodha, India's leading discount brokers offer collateral margin or margin against share for trading in Equity F&O segment. This facility is not available for any other trading segments.
Read Zerodha Review
India's largest broker ICICI Securities is offering this service to its customers since Jan 2012. ICICI customers can use shares in their demat account as margin for equity trading.
This facility allows its customers to use idle equity shares in the demat account to buy stocks and bring funds by T+2 days. Customers can put to use their existing stocks and create limits to invest and trade. These limits can be used to trade in Margin and continue trading in the F&O segment.
This facility is available to trade in equity delivery & cash segment as well as equity F&O (Equity derivatives) segment.
Read ICICI Direct Review