Last Updated on February 21, 2020 by Gopal Gidwani

Ever since India ushered in dematerialisation in 1996, securities trading has become a lot more convenient. Before dematerialisation, traders could only buy and sell physical certificates. This came with certain risks. Certificates could be forged or lost, and there could be delays in certificate transfers. The demat account has eliminated these hassles by dematerialising physical certificates. You are now able to hold securities in digital form, which makes transactions quicker and more secure.

A demat account also offers an additional advantage. You could engage in margin trading by using the shares held in your demat account as collateral. Here, the stockbroker loans you margin funds against your existing shareholdings. In return for this loan against shares, the stockbroker charges interest. Naturally, demat account opening is essential if you want to make the most of this option. But not all stockbrokers offer this facility. So before you begin the process of demat account opening, shop around for a broker that allows margin trading.

Margin trading is a good way to find a use for shares that are sitting idle in your account. The margin against shares can prove handy if you are short on funds when a trading opportunity arises or you need to make an immediate payment.

Margin against shares in demat account: Know the basics
Brokers will not provide margin funds amounting to 100% of the value of your shareholdings. The margins offered will also vary from one broker to another. So compare different brokers before you kick off the demat account opening process.

Brokers provide margin funding based on a cash-to-collateral ratio. The ratio varies based on the category of shares traded as well as the trading segment you are participating in, whether intraday, delivery, futures and options, and so on.

Keep in mind that your broker will provide the margin funds after subtracting the haircut from the share’s current market price. The haircut works as a safeguard for the broker in case the share price moves adversely. If the haircut on the share you hold is 20%, you will receive up to 80% of the value of your shareholdings.

Placing a margin request after demat account opening
Once you have some shares after demat account opening, you can put in a margin request. The process is simple enough:

• Log in to your demat account and go to the demat holdings page.
• Select the shares you would like to pledge as collateral.
• The broker will deduct the haircut to arrive at the collateral value.
• The broker will then apply the cash-to-collateral ratio to arrive at the margin funding available.
• Once the margin funds are transferred to your account, you can use the money to buy and sell shares.

Demat account share transfer when requesting margin funds
When you place a margin request, the shares you pledge are transferred off-market to the stockbroker’s demat account. The shares move to the margin account of the depository with which broker is registered. You now have T+2 days to return the borrowed margin funds to the stockbroker and take back your pledged shares.

Margin against shares in demat account: Points to remember

• Unpledging of shares: The process is the same as for pledging shares to place a margin request. You log in to your demat account, visit the demat holdings page, and unselect the pledged shares that you wish to unpledge.
• Charges and fees: You will have to pay interest on the margin. You may also incur a fee each time you pledge or unpledge shares.
• Benefits: Any dividends, bonus, or rights issue on the pledged shares are enjoyed by the trader and not the broker.

Trading with margin against shares in demat account: An example
Suppose Trader X buys 1,000 units of a stock trading at Rs 100 per share through margin trading. Now, say, he has to pay an initial margin of 25%, which works out to Rs 25,000. He can cover this partly in cash and partly using shares as margin. Alternatively, he can pay the entire among using shares as margin.

However, the total amount payable is Rs 1 lakh. Assuming Trader X pays the initial margin using only shares against margin, he will incur interest on the shares against margin utilised (Rs. 25,000) from T+1 days of the trade. From T+3 days, he will incur interest on the outstanding amount as well (Rs 1 lakh – Rs 25,000).

Had he paid a portion of the initial margin in cash, that amount would be excluded from the interest calculations.

Conclusion
When shares sit idle in your demat account, they can lock in a sizeable amount of capital. Why let that happen? All you have to do is open a demat account with a dependable broker like Kotak Securities that offers the margin trading facility. Use the margin funds to cash in on lucrative trading opportunities when your cash balance is low. Provided you have a strategy in mind and exercise some caution, there is no reason to scale down your trading plans. By bringing those out-of-action shares into play, you could add a new layer of complexity to your day-to-day trades.