Margin against shares: Unlock your hidden trading potential!

Some trades require you to invest a lot of capital, which you may not always possess. Arranging funds at short notice might be difficult. At the same time you don't want to miss out on lucrative trading opportunities. This is where the concept of margin against shares can help. As a trader, you can use this facility to bridge capital shortfall and ensure you don’t miss out on profitable opportunities. Read to know more about margin against shares and how it works.

What is Margin against Shares?

Margin against shares is a facility where you can borrow funds from your stockbroker by pledging shares you hold in your Demat account as collateral. Most stockbrokers offering this facility levy interest on the borrowed amount at a certain rate. This interest is levied on a daily basis up until you fully repay the borrowed amount.

Also, the amount of margin you’re entitled to is dependent on multiple factors like the broker, haircut on the shares you own etc. Generally, most stockbrokers offer anywhere from 60% to 80% of the value of the pledged stocks as margin.

Margin against Stocks: An Example

Now that you’re aware of what margin against shares is, let’s try to get a more in-depth understanding of the concept with the help of a hypothetical example. Assume you wish to purchase 100 shares of a company trading at Rs. 580 per share. The total amount you would need to purchase the above quantity of shares comes up to Rs. 58,000. However, you only have Rs. 25,000 in your trading account. Not wanting to let go of this short-term trading opportunity, you opt for the margin against the stock facility offered by your broker.

Since you have around Rs.50,000 worth of shares, you choose to pledge them with your stock broker, who is willing to lend 70% of its current market price as a loan. The amount you would get by pledging your shares comes to around Rs. 35,000. You use this combined with the Rs. 25,000 you already have in your trading account balance to purchase 100 shares of the company.

After 10 days from the date of purchase, you decide to book profits by selling your entire holdings. You then use the proceeds from the sale to repay the amount borrowed from your stockbroker along with interest. Assuming that the rate of interest is 18% per annum, the total interest for the 10-day period comes to about Rs. 175 [Rs. 35,000 * (18% ÷ 365) * 10].

Once you repay the borrowed amount along with interest, which comes up to a total of Rs. 35,175, your stockbroker will withdraw the pledge created on your stocks.

What happens to the pledged stocks?

As you’ve already seen in the example above, when you use the margin against the shares facility, the stockbroker sends a pledge request for the shares you opt to use as collateral for the loan. Once you accept the pledge request, your broker will credit the funds to your trading account.

Now, although you would continue to be the owner of the pledged shares, you cannot sell or transfer the shares to another Demat account. The control and right over the shares will effectively rest with the broker. If you fail to maintain adequate margin, or repay the borrowed amount (or interest), the broker can liquidate the pledged shares by selling them in the market to recover the loaned amount.

If you successfully repay the borrowed amount along with interest, your broker will unpledge your shares, relinquishing all the rights and control over them. Once the pledge is removed, you can freely sell or transfer the shares out of your demat account.
As you can see, margin against shares is a good way to temporarily gain access to additional funds by pledging stocks held in your Demat account. However, it is important to take the services of the right broker with low interest rates. In this case, m.Stock offers Margin Pledge at one of the most affordable interest rates i.e., 9.99% which comes to just 0.027% per day. You also get the added advantage of using margin received under Margin Pledge to take positions under MTF (Pay Later). All this is available to you at ₹10 brokerage on all trades. So, open a Free Demat account with m.Stock and trade big with our leveraged products!