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Understanding Margin Against Shares

Introduction

Consider a scenario where you have some shares in your Demat account that you are holding for the long term. You are confident that they will appreciate in value over time, but you also want to take advantage of the short-term opportunities in the stock market. You don't have enough cash to invest in other instruments and don't want to sell your shares either. What can you do?

One option is to use a Margin Against Shares (MAS). MAS is a type of margin trading that allows you to borrow money from your broker using the shares in your Demat account as collateral. You can use the borrowed money to trade in various financial instruments, such as intraday trading, equity futures, indices, and currency. This way, you can leverage your existing portfolio, diversify your investments, and increase your returns.

Let’s understand how MAS works and the factors that affect the margin amount.

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How to avail of MAS?

To access MAS, you must have a Demat with the same broker. You must also sign an agreement with your broker authorizing them to pledge your shares and lend you money. Here’s the process of using MAS:

  • You can start by placing a pledge request with your broker, specifying the shares you want to pledge and the amount of money you wish to borrow.
  • Your broker transfers the shares from your Demat account to their own Demat account and marks them as pledged. You cannot sell or transfer these shares until you repay the loan.
  • The broker deposits the margin amount into your trading account, allowing you to trade with eligible instruments.
  • You repay the loan by selling the instruments you bought with the margin money or depositing cash in your trading account.
  • Your broker releases the pledge on your shares and transfers them back to your Demat account.

What are the factors that affect the margin amount?

The margin amount that you can borrow depends on several factors, such as:

  • Share value

The higher the value of your shares, the more money you can borrow. However, the value of your shares is not the same as the market price of your shares. Your broker applies a discount factor, called the haircut percentage, to the market price of your shares to determine their value. This percentage varies from broker to broker and from share to share, depending on the liquidity and volatility of the share.

For example, suppose the market price of a share is Rs. 100, and the haircut percentage is 20%. In that case, the value of the share for MAS is Rs. 80.

  • Cash-collateral ratio

The cash-collateral ratio is the proportion of cash and shares you must maintain in your account as a margin. For example, if the cash-collateral ratio is 50:50, then you need to have 50% of the margin amount in cash and 50% in shares. The ratio varies from broker to broker and from instrument to instrument, depending on the risk and leverage involved. For example, if you want to trade in equity futures, you may need a higher cash-collateral ratio than if you want to trade in intraday trading.

  • Margin Requirement 

This is the minimum amount of money you need in your account to enter and maintain a position in the market. The exchange or the regulator determines the margin requirement, depending on the instrument you are trading, the lot size, the contract value, and the market volatility. For example, if you want to buy one lot of Nifty futures, which has a lot size of 75 and a contract value of Rs. 11,25,000 (assuming Nifty is at 15,000), and the margin requirement is 10%, then you need to have Rs. 1,12,500 in your account as margin.

Conclusion

MAS allows you to trade in various instruments, such as intraday trading, equity futures, indices, and currency. It can help you leverage your existing portfolio, diversify your investments, and increase your returns. However, MAS also involves risks and costs, such as interest charges, margin calls, and liquidation. Therefore, you need to be prudent while using MAS. 

You must choose the right broker, monitor the market movements, maintain adequate margins, and use MAS wisely. MAS can be a useful tool for enhancing your returns and diversifying your investments, but it also requires a clear objective, a sound strategy, and a disciplined approach.

 

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