Sometimes you find a profitable position in the stock market, but it requires a hefty amount to invest. It is common when the market is bullish, and investors have opportunities to gain significantly. It may be that you do have investible funds in your account, due to which you may lose trade opportunities. But, if you hold stocks of shares in your demat account, you can take advantage of these shares.
In the capital market, margin trading is a value-added service with the brokers that allow traders to buy more stocks than they can buy with the available funds with them. This facility is available against demat shares also.
What is the Margin Against Shares?
A margin against shares is a form of margin. Brokers offer a margin trading facility (MTF) against shares to traders in need of urgent funds for trading. They use it for leveraged positions in the stock market.
Margin against share can be defined as a loan against share at an agreed interest rate provided by the stockbroker for trading activities. Traders can collateralize their Demat stocks to receive a loan. It is one of the benefits of Demat accounts. Margin refers to the amount or a percentage of total trade value. Simply, it is an act of borrowing. It is the amount that a trader needs to pay upfront to take the position. Generally, it is used by full-time traders who have enough experience in the stock market.
Thus, Demat shares can be used to pay the margin and realize a profit with timely trading action. You should look for a stock broker offering a low-cost margin trading facility. Generally, traders prefer discount brokers for MTF trades. Renowned discount brokers are known for the lowest MTF interest rates with their subscription-based brokerage plans. They offer a free demat account and trading account to their clients with a subscription plan.
How does Margin Against Shares In Demat Account work?
The stockbroker takes the shares as collateral and lends the trader required funds on a short-term basis.
When shares are used as margin, ownership of shares does not change. The investor still owns the shares in the margin account.
- The trader transfers the demat shares to the broker’s beneficiary account.
- Then the broker transfers those shares to the client’s margin account and calculates the value of collateralised shares for margin after deducting a haircut.
- The trader can take a position using the MTF. They can close the positions and take back the collateral stocks if they no longer want to avail the margin.
- As mentioned, it is a loan against shares, and you need to repay the principal with interest. If you are unable to repay the loan, the broker is bound to recover the borrowings from the collateralised shares.
Calculation of margin
Traders should note that brokers do not provide 100% value of shares in your portfolio used as margins.
Brokers reduce the value of your demat shares by a certain percentage while valuing them for margin. It protects the broker from the risks of the declined share price. It is called a ‘haircut’.
Suppose, the share value in your demat account is determined at Rs. 50,000 at the time when you look for margin trade against shares. The broker will have to reduce a certain percentage of the current market price of your shares.
Additionally, margin value differs with different brokers and different holdings. Margin trading interest rates might be more beneficial with discount brokerage firms.
Thus, Margin trading is an effective way for traders who have a shortage of funds to take a profitable position in the stock market at a point in time. Traders can utilize the facility against shares as a margin to make higher returns. However, margin against shares involves a certain level of risk if the market fluctuates and unfavour you. Therefore, have enough knowledge about the market and use the margin for a sure-shot profitable position.