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What is meant by margin against shares?
We often hear stock brokers mention that they provide additional services such as margin against securities to their clients, but what exactly does this facility mean?
Margin against shares, is a service that brokers provide to customers who hold shares with them. The broker tends to take the shares as collateral and provides the client funds to trade on a short-term basis.
Hence, the client is able to trade in the market by leveraging the existing stocks in his portfolio. This is generally observed when the markets are in a bull run and clients are eager to make maximum returns.
How does margin against shares work?
The broker provides funds to his/her clients based on the quantum and category of shares held by the latter in his/her demat account.
a) Shares are first transferred by clients from his personal demat account to broker’s beneficiary account through an off-market transfer.
b) These shares are then moved to the client’s margin account held with the broker's depository participant.
c) The broker provides the client with margin based on the value of the former’s shares after calculating a haircut, as prescribed by the exchange.
d) Client can use this margin for equity intra-day trade, equity futures trade, and for writing of options in equities, indices, and currency segments. This facility cannot be used to buy options or to take equity delivery positions in cash segment.
e) The client can ask the broker to transfer his/her shares back to the demat account at any point of time if he/she does not want to avail the margin against shares facility any longer.
Cost associated with margin against shares
Brokers, usually, do not charge anything as such for using the facility of margin against shares.
However, there is a cost involved for off-market transfer of shares from client’s account to broker's beneficiary account. These charges depend on your depositary participant and also on your broker
Is there a change of ownership?
The client remains the owner of the shares at all points of time, i.e. even after transferring the shares to the broker for collateral margin. The only catch is that the client will not be able to sell the shares until they are unpledged. However, the client is entitled to all corporate actions such as dividends, bonus shares, rights issue, stock split, and voting rights, among others.
How is the margin calculated? How much is actually available for trading?
Only certain securities are taken into consideration for margin facility (list provided by the broker). Once the client transfers these, he gets margin against those shares after deducting the exchange prescribed haircut.
Consider a client has the following securities in his portfolio:
|Stock||Price as on March 13 2018 (in Rs.)||Quantity||Net value|
If he wants to pledge 1,000 ITC shares that are trading at Rs.370 in order to take a position in Nifty futures, the value of the pledged shares will be
If the applicable haircut is 15%, the broker would provide Rs.3,14,500 to the client and keep the remaining Rs.55,500 as risk cover.
Note that with most brokers, margin against shares does not cover 100% of the margin a customer requires to make a trade. Exchanges have set the cash-collateral ratio to nearly 50:50. What this means is that 50% of the margin has to compulsorily come through cash while the rest can be utilized from the collateral margin.
Let us use an example to understand this.
Assume that the client has a bullish view on the market and decides to purchase five lots of Nifty Futures which requires Rs.3,14,160. In order to take up such a position, the client will have to have Rs.1,57,000 cash in his account, while the remaining margin can be taken from the ITC shares that are pledged. The client will not be able take up the position entirely with the shares that are pledged.
What if you incur losses using margin money?
If a client incurs a loss while trading in the futures and options segment and is not able to meet the required mark to market additional capital, the broker, in such a scenario, holds the right to sell the shares that were pledged to make up for the losses.