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Cashless investing with Pledge Shares facility
Opportunities in the stock market are endless. However, margin available with investors and traders is limited. This means investors sometimes end up missing out on investment opportunities due to lack of capital. This is where Pay Later (MTF) facility comes to the rescue as investors can get up to 80% funding against 20% capital of their own.
But even with Pay Later (MTF), 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 margin received under Pledge Shares to take delivery positions with Pay Later (MTF).
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:
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IntradayYou 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.
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OptionsBeing 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.
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DeliveryYou can place a delivery order and get the stocks in your portfolio. However, even with Pay Later (MTF) you will need a minimum capital of ₹4,54,500. And in case you do not have the minimum capital, you might lose out on this opportunity.
This is where you can use Pledge Shares to get margin against your pledged shares and use that capital to avail up to 80% funding through Pay Later (MTF).
This is how this Pay Later (MTF) – Pledge Shares set up will work
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Pledge your existing stock portfolio, HDFC Bank Ltd. worth ₹16 lakh with your broker
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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 with Pay Later (MTF)
Wait, there’s more. You still have a balance available margin of ₹8,25,500 that you can use to invest in other stocks with Pay Later (MTF).
So, by optimally using both Pledge Shares and Pay Later (MTF), 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 Pay Later (MTF) and just 9,99% p.a. for Pledge Shares
- Unlimited holding period on MTF position
In addition to these, other benefits of Pledge Shares include
- No interest on intraday trades
- Interest charged from the day you start utilising the margin, not from the day margin is credited to your account
It is important to understand how interest will be charged in this scenario.
Let’s assume,
- Position value: ₹1,00,000
- Funding by m.Stock Pay Later (MTF): ₹70,000
- Interest charged on ₹70,000 MTF as per MTF debit slab: 9.99% p.a.
- Available cash margin: ₹1,00,000
- Available margin against pledged shares: ₹80,000
- Interest charged on ₹30,000 margin utilised by pledging stocks out of the stock balance: 9.99% p.a.
Now, if the value of the stocks decreases from ₹1,00,000 to ₹95,000, an additional margin of ₹5,000 will be needed. The margin call will be fulfilled from the remaining available margin against pledged shares.
Interest charged on ₹30,000 + extra ₹5,000 margin utilised by pledging stocks out of the stock balance: 9.99% p.a.
Now, if the margin against pledged stocks is ₹32,000 instead of ₹80,000 in the above-mentioned example, an additional margin requirement of ₹2,000 will be fulfilled from the margin against pledged stocks, on which Pledge Shares interest of 9.99% p.a. would be levied, and ₹3,000 will be fulfilled from the available cash margin, on which no interest would be charged.
Similarly, if the available margin against pledged stocks is only ₹32,000 instead of ₹80,000 and the available cash margin is ₹1,000 instead of ₹1,00,000 in our above example, there would be a margin call for ₹2,000 [₹30,000 initial margin + ₹5,000 additional margin – (₹32,000 Pledge Shares stocks + ₹1,000 cash margin)].
In case the margin call is not fulfilled, the MTF position will be squared off. Till the position is squared off, the additional ₹2,000 margin requirement will be fulfilled from available margin against pledged stocks on which Pledge Shares interest of 9.99% p.a. will be levied; ₹1,000, will be fulfilled from cash margin on which no interest would be charged, and on the shortfall of ₹2,000, MTF interest will be charged as per the MTF interest slab, which is 9.99% in this case.
This means on subsequent margin calls, if your margin against pledged shares is exhausted and you have available cash margin, then the margin call request will be fulfilled from the cash margin.
The available margin will be first adjusted from the Derivatives and Cash Segment and then MTF.
Pay Later (MTF) and Pledge Shares when used together, can potentially transform your trading and investment game. So, go ahead, trade with zero cash now!
