Margin against shares in Demat account – How it works?

Margin against shares in Demat account : Margin against shares is a value added service provided by the stock brokers to their customers. It allows the customers/clients to use the shares held in the demat account as collateral to get the margin funding required for trade. This service is provided freely by the stock brokers o their customers who hold the shares in the demat account. Investors who hold the shares as a long term investment can use these shares to get the margin funding to carry out the trade without worrying much about the finances needed for buying the stocks.

Cash to Collateral ratio:

Margin against shares does not provide the 100% of the margin as needed by the customer to execute the trade. Brokers maintain a cash to collateral ration according to which the margin funding is allowed. If this ratio is 20:90, it means the customer has to maintain 20% of the total margin has to be maintained in cash with the broker.

How does it work?

  • Customer approaches his broker requesting him to extend the margin against his shares
  • Then shares held by the customer in his demat account are transferred to the demat account of stock broker which is specifically maintained for margin purposes. This is an off-market transfer.
  • Shares so transferred will automatically move to the margin account held by broker’s depository
  • Based on the shares transferred, brokers calculate the collateral value of these securities. This is done applying the exchange’s haircut. For example, if the exchange prescribed haircut is 10%, then the collateral value of shares worth Rs 1, 00,000 would be Rs 90,000.
  • Cash to collateral is applied on the collateral valued so calculated. And then customer is allowed to use the margin against shares.
  • Margin so granted will be used by the customer for trading. T+2 days are available to arrange funds while buying stocks.
  • If the customer does not want the margin anymore, he may request the broker to transfer the shares back to his account.

Charges:

Generally brokers do not charge any extra fees for providing the margin against shares. This is a value added service provided by most of the full service/traditional brokers. However, transfer charges are to be paid by the customer for off-market transfer of shares. And this would be a flat rate. Most of the broker charge ₹60 + GST irrespective of the quantity pledged.

Dividend on transferred shares:

Even though the shares are transferred to the broker’s account, there will be no change in the ownership rights of the customer. Customer will remain entitled to the benefits such as dividend, bonus shares and voting rights etc.

Other important points to note:

  • Brokers place the details of the approved shares eligible for collateral on their websites along with the applicable haircut %. For example visit the below link to check the scrips allowed for pledge by Zerodha. click here
  • Nowadays, no cash to collateral is asked by most of the stock brokers. Hair cut% is deducted from the Value of the shares pledged to arrive at the eligible margin amount.