Stock Collateral as Margin
1. What is the collateral margin?
In Composite Investments we offer collateral margin for traders only. We provide margin for trading in Futures and for selling Options only. A new trader can open a demat account. You must transfer the funds you wish to trade in once the account has been set up. You may now trade to the full extent of your available funds. However, if you would like to trade more but do not instantly have the money, you can borrow money from a bank and use it for investments. The hefty interest rate on these loans serves as a disincentive for you. The collateral Margin facility will come in handy for traders who would like to avail the facility against existing stocks or bonds that they may hold in their demat accounts.
For traders, it provides an excellent option:
- It is a loan secured against bonds, shares, mutual funds, or ETFs.
- The loan is provided by pledging the securities held as collateral.
- Collateral Margin refers to this loan.
- The pledge that a shareholder can make on the stocks, bonds, and mutual funds in his demat account is known as collateral margin.
- The shares in the demat account are kept as security.
- Composite Investments provides collateral at a 50:50 ratio of cash vs collateral basis.
- Collateral Margin is at the discretion of Composite Investments and reserves the right to extend the same to client.
2. How does collateral margin benefit traders?
- Traders can avail the collateral margin facility online.
- Traders can leverage shares sitting dormant in their demat accounts and can generate extra leverage for you to trade with.
- Unleash the value in your demat holdings to trade in F&O (only).
3. Advantage: Collateral Margin
- You can use securities in your demat account that are currently unused.
- Using the collateral margin, you can take advantage of any short-term market possibilities.
- You can use the shares as collateral for a pledge within a short period of time to take advantage of any short-term trading opportunities.
- To trade in the markets, you do not need to avail of a pricey personal loan.
4. How to obtain a collateral Margin
Stage 1: After deducting a percentage of the share's value, the margin against the pledged securities is allocated. It denotes that you will not receive the entire value of the securities as margin. The upper limit is determined by the security type. Compared to blue-chip companies, the margin limit for mid-cap stocks would be smaller. The limit is set by the broker. Higher the volatility, lower the margin provided on the securities held in your demat. Brokers maintain a reserve to offset a decline in security value during market downturns.
Stage 2: You can access your demat holdings by visiting your back office login. The ability to pledge shares against each shareholding is available. These assets are collateralized by margin securities. To account for volatility and a decline in the price of an asset, a haircut, or reduction in share value, is applied. The investor receives the balance as a trading limit.
Stage 3: For instance, your demat account contains stocks with a value of Rs. 10,00,000. Under the Exchange rules, the exchange specifies the limits, and the broker may or may not apply an additional haircut depending on the market volatility. If a 20% haircut is applied in this case, the remaining would be used as pledge margin, giving you a trading limit of Rs. 800,000 for the shares you have pledged. Please note that at every stage of availing collateral margin for trading, 50% of the total margin required would have to be in the form of cash only and the remaining can be in the form of pledged stock value after haircut. The following illustration will help understand the concept better:
This pledge margin may only be used for F&O trading. The procedure is straightforward and done online; a shareholder may access his online account to check on things like his limit, utilization, and the haircut on the approved securities.
Stage 4: Each time the securities are pledged and unpledged, a fee is applicable.
Stage 5: Any activity in the demat account, such as a bonus, rights issue, dividend, or other event, will be activated for the client's gain. As the shareholder and final beneficiary, these do not belong to the broker. Your shares are temporarily restricted from any sale when you pledge them as collateral for a margin loan. When you apply for a secured loan, the securities are held by the bank just like the collateral is, and they serve as a guarantee until you pay the whole amount of interest and the margin.
5. How safe are my Collateral securities?
Last year, in consideration of the interests of the investor, SEBI required brokers to submit all such pledged securities to SEBI. This was done in order to prevent situations when negligent brokers pledged customer shares without their knowledge in order to satisfy other clients' margin demands. Brokers no longer maintain securities in a shared pool to prevent misuse in order to avoid such occurrences. Without the client's consent, a broker cannot offer their security. Shares that have been pledged by shareholders are marked as pledged and remain in the accounts of investors solely. The shares cannot be moved from one account to another by the broker. This gives the shareholder an additional sense of security and comfort.
5. The list of securities for pledge and the applicable conditions
The list of securities (Annexures) are classified based on the NSE list of approved securities broadly into cash and non-cash equivalents. These securities are further classified into Stocks, ETF, MF, Govt Bonds, Corporate Bonds and FDR. They are tabulated below for your convenience:
Notes:
- Composite Investments provides the Collateral Margin facility to trade in the F&O Segment (For Options selling and Futures trading ONLY)
- Every transaction with collateral margin would require 50% as cash Margin and the balance in the form of collateral. This includes MTM losses which means that if the cash margin falls below 50% after MTM losses, then additional cash has to be provided immediately.
- Any delay in providing cash margin would invite a penalty and squaring-off of trades with no intimation as it is very time sensitive by execution.
- Traders are expected to maintain adequate margin and review the MTM during market hours on real time basis to avoid any margin calls and square-off penalty.
- Please always refer to the updated exchange list before making any decision.
- VaR – Value at Risk – The margin as prescribed by the exchange.
- Haircut in some cases is linked to VaR or a fixed percentage as listed above.
- Government Bonds, T-bills, FDR, Liquid /Money Market Funds and select ETF are eligible as cash equivalent.
- All instruments will be subject to an overall quantity limit and further a broker limit which is subject to change.
- T-bills and select bonds have the lowest haircut of 2% while the highest is applied to stocks and bonds in the range of 15-20% (subject to change)
- All major Equity & Debt funds are eligible for pledge with over 3800 schemes and over 1400 stocks available followed by corporate bonds.
- A list of approved securities across the categories can be found via the link below: https://compositedge.com/downloads/margins