All you need to know about margin against shares

Margin Against Shares is a financial tool that lets traders borrow money by using shares held in their brokerage accounts as collateral. In other words, it is like taking out a loan against your own stocks. 

This idea is important to the financial markets because it gives investors and traders extra purchasing power, which helps them magnify their investments and potentially increase returns. 

In this article, let us now dig into this concept more deeply to understand what is margin against shares and what it implies.

What is margin against shares?

Margin Against Shares (MAS) is a lending facility offered by brokers. It allows you to overdraw your DEMAT account to invest in a deal without increasing your risk quotient. 

Essentially, you’re borrowing from the broker using your current stocks as collateral. This enables you to buy more stocks than you could with your own funds. 

The broker calculates the loan amount after deducting a certain percentage (known as a ‘haircut’) from the market value of your shares. This process is also known as pledging.

How does margin against shares work?

First, check if your broker provides Margin Against Shares (MAS) as an added service. Here’s how it operates:

• Clients transfer their shares from their personal account to the broker’s beneficiary account.
• The broker then moves those shares to the client’s margin account under the broker’s depository participant.
• The margin amount is calculated based on the value of shares, after deducting a ‘haircut’. A ‘haircut’ is the difference between the asset’s market value and the amount that can be used for collateral.
• Clients can use the margin amount for various financial activities, such as trading stocks within the same day, dealing with equity futures, indices, currency, and more. However, this margin can’t be used for buying options or for taking delivery of equities.

The client can take back the collateral stocks at any point if they no longer want to avail the margin. It’s important to note that because margin against shares carries a higher risk, only a few stockbrokers offer it. 

Process and cost of receiving margin

The process of receiving a margin loan against shares involves a few steps:

• Transfer of shares: Clients transfer their shares from their personal account to the broker’s beneficiary account.
• Shift to margin account: The broker then shifts those shares to the client’s margin account under the broker’s depository participant.
• Margin calculation: The margin amount is calculated based on the value of shares, after deducting a haircut. A ‘haircut’ in the capital market is the difference between the asset’s market value and the amount that can be used for collateral.
• Use of margin: Clients can use the margin amount on a variety of financial instruments like trading stocks in intraday trading, equity futures trading, indices, currency, and more. However, this margin cannot be used for purchasing options or receiving stocks.

As for the cost of receiving margin, it depends on your broker. Your Margin Against Shares (MAS) account is different from your DEMAT account. It may come as an additional service when you open a DEMAT and trading account with your broker or separately. When starting an account, the brokers will require a first deposit to be made known as the initial margin.

Keep in mind that there may be different charges and procedures depending on the broker and the specific terms of your account. It’s always a good idea to check with your broker for the most accurate information.

What happens to the stocks in margin against shares?

When you use margin against your shares, you’re still the owner of those shares. The ownership doesn’t change. As long as you meet your obligations, like paying interest, you can use the margin for as long as you need. If you sell shares from your margin account, the money goes to the broker to cover the margin amount you owe.

Additionally, there are a few important points to remember when using margin against shares. Not all securities can be used as collateral for margin. You should ask your broker for a list of stocks, bonds, or ETFs that can be used as collateral for margin loans.

When you request a margin for loan against shares, the broker will provide the amount you need after deducting an approved percentage called the exchange-approved haircut.

Also, exchanges have rules that limit how much margin you can use for a trade. The limit against shares DP to margin is the amount of money a broker allows you to borrow, typically as a percentage of the value of your securities in your account.

They set a cash collateral ratio at 50:50, which means that only half of the total deal volume can be paid using margin. The rest must come from new cash investments. So, you can’t use a 100% margin for a trade; you need to put in some fresh cash too.

For example, if you want to buy NIFTY Futures worth Rs 1,00,000, you’ll need to pay Rs 50,000 upfront in cash. Then, you can use the margin against your shares to cover the rest of the amount. So, you only need to pay half of the deal upfront, and the rest can be covered using margin against shares.

Difference between margin funding and loan against shares

Margin Trade Funding (MTF) and Loan Against Shares (LAS) are both credit facilities that are secured by creating a pledge over existing shares. However, they serve different purposes and have different rules.

Conclusion

Understanding Margin Against Shares is important in the world of finance. It gives you more buying power and a chance for higher profits, but it also comes with risks. Remember to be careful and understand how it works before diving in.

If you’re looking to learn more about stock trading and investment strategies, read StockGro blogs.

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