Have you ever wanted to trade but didn’t have enough cash on hand while holding stocks you believe will perform well and don’t want to sell? This is where Margin Against Shares (MAS) comes in. It’s a popular and highly effective facility that allows you to borrow funds by pledging the shares you already own, giving you the liquidity to trade without having to sell your investments.
We’ll explain the concept of Margin Against Shares (MAS) in an easy-to-understand way with an example. Moreover, we will discuss its advantages and disadvantages.
Understanding Margin Against Shares
Consider it this way – You have shares in your demat account. When you need more money to trade, you can pledge these shares to your broker rather than selling them. You receive a certain amount of money (also referred to as “pledged margin”) in exchange, which you can use to trade more stocks or derivative contracts.
How Does it Work?
Usually, it goes like this:
- You have shares in your demat account.
- You request that your broker pledge those shares.
- After evaluating their eligibility, the broker informs you of the margin you will receive, which is normally between 50% and 80% of the total value.
- That sum is credited to your trading account as pledged margin.
- Now you can trade with it.
- You can unpledge your shares if you no longer need margin to trade.
Example: Suppose you own ₹1,00,000 worth of ABC stock. Your broker gives you a ₹60,000 margin (at 60%) after you pledge it. You can now trade with more purchasing power without having to sell your shares or transfer additional funds.
Read Also: Margin Pledge: Meaning, Risks, And Benefits
Benefits/Risks of Margin Against Shares
Benefits
1. You Are Not Required to Sell Your Stocks
You want to trade but do not want to part with your long-term holdings? Instead of selling your shares, MAS allows you to borrow against them.
2. Easy Access to Money
All you have to do is pledge your shares to access funds, which can sometimes be fulfilled within a matter of hours.
3. Increased Profit Potential
Your money stays invested in your shares while also being used as collateral for trading, allowing you to maximize the potential of your capital.
4. Do With It As You See Fit
You may use the pledged margin to trade F&O or additional stocks on an intraday basis.
5. The shares are still yours.
You still receive dividends, bonuses, and other benefits even though your shares are pledged.
Risks
1. Markets May Be Volatile
Your margin limit also decreases if the value of the shares you pledged declines, and your broker may request that you deposit additional money or pledge additional securities.
2. Your Shares May Be Sold
Your broker may sell your pledged shares or square off your trades to make up the difference if you don’t fulfill margin requirements promptly.
3. Interest Charges May Increase
It is not always free to use the margin. Trading in F&O contracts may attract interest charges if the cash component of the margin requirement is funded by your broker.
4. Not Every Stock Is Permitted
Not all shares are allowed for availing margin against shares. You can only pledge shares that are approved by your broker and permitted by regulatory authorities.
5. Significant Losses
You could be tempted to trade more than you should if you have additional money. Additionally, overtrading in the market can quickly result in significant losses.
Read Also: What is Stock Margin?
Conclusion
If you wish to do trading without depositing additional funds and selling your favourite stocks, using margin against shares is a wise choice. It is efficient, enhances profit potential, but also involves risks. Therefore, if you want to use it, start small, stay informed, and never trade beyond your comfort level. When used properly, MAS can be an effective tool for increasing your profits without affecting your long-term investments.
Frequently Asked Questions (FAQs)
Is it possible for me to sell pledged shares at any time?
No, you must first unpledge them.
What would happen if stock prices fell?
A margin call to transfer additional funds or pledge additional securities might be sent to you by your broker.
After pledging, how long does it take to receive the margin?
Usually within one working day, you get access to margin funds.
Is it possible to use a joint account for this?
Yes, but it might require approval from both account holders.
Is this something that all brokers provide?
Check with your broker; the majority of full-service and discount brokers currently offer this facility.
