Stock brokers in India provide a plethora of services to their clients. Have you heard about an additional service called Margin against Securities/Shares (MAS)? What is MAS? What’s the significance of Margin against shares held in a demat account and how it actually works? If you are looking for an answer to these important queries. Wait, you’ll probably get to know some crucial points here.
Before we begin, just remember: Opening an online Demat account is the essential pre-requisite for availing the Margin against shares (MAS) benefit.
Margin against Shares (MAS): Meaning
Margin against shares is a value added service offered by some of the stock brokers in India. MAS facility is given to the customers who hold shares with them. MAS is a loan against shares at an agreed rate of interest, also referred to as collateral margin.
Simply stating, Margin against shares offers the clients to use the shares in their demat account for getting the margin funding required for trading. The stock broker keeps the client’s shares as a collateral. The clients are provided funds based on the quantum and category of shares held in their demat account.
As a client, you can use this margin for equity intra-day trading, equity future trading and currency derivatives etc.
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How does Margin against Shares Work?
Margin against Shares option is made available on different trading platforms like mobile, desktop and browser. You simply pledge your demat account holdings to initiate trading. Let’s know how this margin against shares actually works.
1. Margin Request:
The first step is to place a pledge request for availing Margin. The pledge charges shall be deducted before you keep your demat account shares as a collateral.
2. Transfer of Shares:
You transfer shares from your personal demat account to the stock broker’s beneficiary account with an off-market transfer. These are further transferred to your margin account.
3. Calculate Margin:
The collateral value of shares in demat account is calculated after applying the haircut, as prescribed by the exchange. Haircut is the arbitrary deduction made in the security value for covering the risk.
E.g. If you pledge stocks worth Rs.1 lakh and haircut is 10% then Rs.90000 only shall be considered for collateral margin in your trading account.
For utilising 100% of MAS feature, you have to maintain a cash-collateral ratio as asked by the broker. Based on different brokers, the total limit for trading is subject to a Cash to Collateral Ratio like 40:60 or 50:50 in few cases. This implies that some of the margin needs to be in cash to avail the complete benefit of collateral.
The margin facility is provided on certain securities as defined by the broker. The list of scripts is available with the demat account provider and usually ranges around 850 stocks.
You can request to transfer the shares back to your demat account anytime, if you wish to discontinue the margin against shares option. You remain the owner of the shares and are entitled to dividends, bonus, right issue etc. even if you transfer them for collateral margin. However, some brokers don’t give the right to sell the shares in your demat account until they are unpledged. While others may allow this as well!
Charges associated with Margin against Shares:
A nominal amount of pledging charges are applicable per script. These charges normally vary as per your depository participant and your stock broker. However, you won’t be charged for un-pledging your shares.
Normal brokerage rates and plans continue to be the same as offered by the stock broker. MAS is an extra advantage that comes along with your online demat account. In fact, there are specific set of rules and cost defined by different stock brokers for requesting and using the MAS facility
Margin against Shares in Demat Account: Real Significance
When the markets are bullish, traders are eager to cash in maximum returns. But, a huge part of your capital gets locked in shares lying in your Demat account. This results in many traders scaling down their trading activities or losing on profitable trades due to lack of funds. This is when Margin against Shares (MAS) facility comes to light and plays a significant role in supporting your trades.
MAS allows you to gain exposure against the shares in your demat account, providing a perfect solution to all your trading needs. The cash to collateral benefit is transferred to your account in T+1 day, thereby allowing seamless trading transactions.
Margin against shares gives you an opportunity to grab and enjoy extensive benefit from your online Demat account. Hence, Margin against shares, is a unique and useful way to utilise your long term demat account investment.
Effect of Corporate Action on Pledged Stocks
In case of any corporate action for pledged stocks the benefits of corporate action will be transferred to the demat account it is in. Hence, in case of
- Dividends: In accordance with the provisions of Section 195 of the Income Tax Act, 1961, the dividends will be taxable. In this case, we may unpledge the securities (due for dividend) on or prior to the record date so that the client can get the dividend directly in their primary bank account.The reason for doing the above is that if the stocks are not in your demat account then you’ll not be able to get the TDS benefit and the amount of dividend you’ll receive will be lower.
- Rights Issue: The rights entitlement benefit goes to the owner of the demat account where the stocks are held on the record date. In case you’d like to apply for the rights issue, please give a request to unpledge the shares. Otherwise, you’ll not be able to apply for the rights issue.
Derive an extra value from your online demat account and boost up your online share trading activities!
Have you opened your online demat account with a reliable stock broker? What do you feel about this additional “Margin against shares” feature for meeting your day to day trading purposes? Feel free to share!