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Margin against Shares in Demat Account – How it works?

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Stock brokers provide the service of margin against shares to the customers. Margin against shares act as collateral security to the broker and the client can use shares of the demat account as a margin for trading. This is a value added service and brokers do not charge for such service from their clients. Investors who hold shares in the demat account for long term can use such shares as security for trading and need not to worry about the finances that would be required for trading the stocks.

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Ratio of Cash to Collateral

100% margin is not available to the customer to execute a trade. Stock brokers generally maintain a ratio of cash to collateral and accordingly they allow margin funding. Suppose the ratio maintained by the broker is 20:80 then the customer will have to maintain a margin of 20% of the total amount in cash with the broker.

Working of Margin Against Cash

  • The customer makes a request to the broker to grant him margin against his shares in the demat account.
  • In an off-market transfer, the broker transfers the shares of the customer from their demat account into his demat account for maintaining the margin.
  • The transferred shares act as a margin and will be automatically transferred against the margin held by the broker’s depository.
  • The broker calculates the collateral value of shares transferred after applying the exchange’s haircut.
  • Before allowing the customer to use the margin against shares, the cash to collateral is applied to the total calculated collateral value.
  • The customer has the time period of T + 2 days to arrange the funds for buying the stocks, till then the margin granted can be used for trading.
  • The broker has to transfer the shares to the customer’s account if the customer no more needs margin.

Charges

  • The service of margin against shares is free of cost and brokers do not charge any extra fees for the same. Even though this value-added service is free but the customers are required to pay for the off-market transfer of shares. Generally the charges are Rs. 60 plus GST.

Dividend on Shares Transferred As Margin

  • When the customer transfers his shares as margin to the broker’s account, he still holds the ownership rights on the shares. Therefore, the customer shall be entitled to benefits like dividend, bonus share, voting rights, etc.

Points To be kept in Mind

  • The customers can find the details of the approved shares eligibility and applicable haircut percentage from the broker or on their official website.
  • Stock brokers these days do not ask for the cash to collateral. The eligible margin amount is arrived after deducting the percentage of hair cut from the value of shares pledged.

Conclusion

Margin against shares in the demat account is an important service for those customers who indulge in regular trading in the stock market. On demat account opening, every customer becomes eligible for this value-added service by the broker. Anyone who is new to the market and wants to know demat account opening procedure must read “What is the procedure to open demat account”.

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