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Cashless investing with Margin Pledge
Opportunities in the stock market are endless. But funding available with investors and traders is limited. This means investors end up missing out on investment and trading opportunities due to lack of capital. This is where Margin Trading Facility (eMargin) comes to the rescue as investors get up to 80% funding against 20% capital.
But even with eMargin, the investor is required to maintain 20% or more capital with them. This might not always be possible. So, what happens when investors run out of cash? Is there an option to trade with zero cash? Yes, there is.
Investors can use funding received under Margin Pledge to take delivery positions under eMargin.
Let us understand how this works -
Say you are bullish on the Banking sector and anticipate a good earnings quarter. You already own 1,000 shares of HDFC Bank Ltd. trading at ₹1,600. The total value of your holdings is ₹16,00,000. To diversify your portfolio, you decide to buy 1,000 shares of IndusInd Bank Ltd. trading at ₹1,500. The total value of this buy transaction is ₹15,00,000.
There are three ways in which you can take this opportunity:
You can place an intraday order in IndusInd Bank Ltd. with a margin of ₹6,04,500. The capital required is low, but you will have to square-off your position on the same day, which isn’t ideal as it might take weeks and months for your strategy (bullish view in banks) to play out.
Being bullish, you can buy call option (CE). 1 lot of IndusInd Bank CE contains 500 shares. You can buy 2 lots (1000 shares) of 1,500 CE option trading at a premium ₹34. You will need margin of ₹34,000. But again, you will have to square-off your position on expiry. Also, Options are risky.
This third option is the safest. But you’ll need a capital of ₹4,54,500 under eMargin. This capital can be arranged by pledging the stocks you hold (HDFC Bank Ltd. valued at ₹16 lakhs).
This is how this eMargin – Margin Pledge set up will work
Pledge your existing stock portfolio, HDFC Bank Ltd. worth ₹16 lakh with your broker
Your broker will give 12.80 lakh against 16 lakh after deducting haircut of 20% Now, you can use ₹4,54,500 out of the available ₹12.80 lakh margin in your account to buy 1,000 shares of IndusInd Bank Ltd under eMargin
Wait, there’s more. You still have a balance available margin of ₹8,25,500 which you can use to invest in other stocks under MTF (eMargin).
So, by optimally using both Margin Pledge and eMargin, you get the following benefits:
- Ability to buy stocks with zero cash balance
- One of the lowest interest rates, starting from 6.99% p.a. for eMargin and just 11.99% for Margin Pledge
- You also enjoy unlimited holding period under eMargin.
eMargin and Margin Pledge when used together, can potentially transform your trading and investment game. So, go ahead, trade with zero cash now!