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You may have found an interesting deal but you need to put in a lot of money. What should you do? You will have to pay for it. This solution comes with two problems. It will take some time to arrange additional funds if your DEMAT account is low. The deal will then be cancelled. It will also increase your market risk exposure. There is a solution to this problem: Your broker may offer you margin.
Market traders who are experienced will be familiar with margin against shares and how they can leverage the market. What is margin against shares? It is simply a loan facility offered by your broker to help you make investments. If you find a good deal, it is possible to overdraw your DEMAT account in order to pay the margin. This will allow you to make a profit and not increase your risk quotient. The broker will take the stocks as collateral, and loan you funds to trade on a temporary basis. This happens when the market's bullish and investors want to maximise their profits.
Margin is defined differently in the capital market than its usual meaning. Margin is a percentage of the total trade volume that the investor must pay in order to be able to buy the deal. Margin buying is a way to borrow money from a broker in order to invest in stocks.
To obtain a loan against their stocks, traders use their current stocks as collateral. It is also known as a loan against security.
Margin allows you buy more stocks than you have the ability to by buying a line credit. However, you must allow a haircut. A haircut is a term that describes the difference between an asset's market price and the amount that can serve as collateral in the capital market.
Find out if your broker offers margin against shares (MAS), as a value-added services. The following is how it works.
Your MAS (Margin Against shares) account is different than your DEMAT account. This may be an additional service that you receive when you open a DEMAT or trading account together with your broker. To activate an account, some brokers may require you to make an initial deposit. This is known as the initial margin. The broker will ask for additional deposits if the margin account is empty.
Although brokers don't usually charge fees to manage your account, additional fees may be charged for any off-market transfers between the client's account and the margin account.
The shares remain the property of the client. The margin account owner remains the client. If you fulfill your obligations such as paying interest, you can continue to use the margin for as long or as you wish. The broker adjusts the margin amount when you sell shares using your margin account.
There are a few other things you should keep in mind when using margin against shares. Only certain securities can be used to collateralize margin advances. Ask your broker for a list of stocks or bonds that are eligible to be used as collateral against margin advances. After you have requested a loan against shares the broker will extend it after taking into account the exchange-approved haircut.
Exchanges have also placed restrictions on the use of 100 percent margin in trades. The cash collateral ratio of exchanges is 50/50. This means that only 50% of the total volume can be paid via margin and the remainder must be invested in cash.
Let's say you want to buy NIFTY Futures worth Rs 3.14,120. You will need to place an order for this deal by paying Rs 1,57,060. This is 50% of the deal amount in cash, and the remainder with margin against shares.
Your profit is calculated by subtracting the margin amount if asset price rises in line with your expectations. The brokers may sell the stocks as collateral if the loan is repaid.
Margin against share in an investment facility that increases your investment capacity. Let your broker provide a line credit to allow you to bet for higher stakes. To hedge your net risk, you can pledge your stocks and ETFs to serve as collaterals. It is a double-sided sword, so you should be careful.