Trading with Collateral as Margin: Everything You Need to Know

Trading in the stock market can be capital-intensive, but did you know you can leverage your existing investments as collateral to meet margin requirements? Collateral-based trading is cheap and lets you use your assets to take advantage of market opportunities. Here’s a simplified, conversational guide to help you understand how it works and what #KotakNeo offers. _____________________________________________________________________________________________________________

What is collateral and how does it work?

Think of collateral as a security deposit for your trades. It can be cash or non-cash assets like stocks, ETFs, mutual funds, Sovereign Gold Bonds (SGBs), or government securities (G-Secs). This collateral backs your trades and allows you to take positions across different market segments like equity, derivatives, and commodities without needing upfront cash. At Kotak Neo, we take things up a notch by offering a vast list of eligible securities—186 ETFs, 888 stocks, and a wide range of SGBs, G-Secs, and mutual funds.

What can be used as collateral?

1. Cash Collateral
   o Cash in your trading account
   o Liquid ETFs and mutual funds
   o Sovereign Gold Bonds (SGBs)
   o Treasury bills and government securities
   
2. Non-Cash Collateral
   o Stocks
   o ETFs (other than liquid ETFs)
   o Mutual funds in Demat form (non-liquid funds)
   o Securities under lock-in periods
   

Unfortunately, physical mutual funds are not allowed as collateral, so make sure they’re in Demat form!

What are haircuts and how do haircuts work?

While collaterals offer many advantages, they also bring in haircuts. A haircut is the reduction applied to the market value of your collateral, factoring in risk, volatility, and liquidity.

• Lower-risk assets like government securities usually have smaller haircuts (e.g., 6%).
• Higher-risk assets like stocks may face haircuts as high as 50%.

For example, if a stock is worth ₹1,000 and has a 20% haircut, its collateral value will be ₹800.

How can one use collaterals in different segments?

You can leverage your collaterals for various trades:

1. Futures & Options (F&O)
In derivatives trading, for instance, one can use collateral to manage positions with no upfront cash.

2. Commodities
   Use your collateral to take positions in commodities and diversify your portfolio.

3. Equity Buying
   

o Collateral is used to buy shares and pay on T+1 (trade date + 1 day) under the NRML (Normal) order type o You will need upfront cash for CNC (Delivery based trades).

Intraday Trading (MIS Orders)

1. You can use the collateral to trade in MIS products, which offers up to 5X leverage
2. It gives you up to 5X exposure, ideal for short-term trading opportunities.
3. Margin Trading Facility (MTF) / Pay Later Wish to own stocks in the long term? Collateral can back your trades while you pay interest on the borrowed margin. However, mutual funds cannot be used as collateral for MTF.

What’s interest in the world of collaterals, you ask?

Interest on collateral in the stock market is charged when the required amount of cash or cash equivalent collateral is not maintained for overnight F&O positions.

How is interest calculated?

Here’s how interest works when using non-cash collateral:

1. No Interest for Intraday Trades
   If you square off your positions before the day ends, you won’t pay any interest—simple as that.

2. Interest on Margin Deficiency
   If you don’t maintain 50% of your margin as cash at EOD, interest is charged on the shortfall.

Example: If your margin requirement is ₹10,000, and you have ₹2,000 in cash and ₹8,000 in non-cash collateral, the shortfall is ₹3,000 (50% of ₹10,000 - ₹2,000). Interest is charged only on this ₹3,000.

Why should you choose Kotak Neo for collateral-based trading?

1. Vast Collateral Coverage
   With 186 ETFs, 888 stocks, and a wide range of SGBs, G-Secs, and mutual funds, Kotak Securities offers an extensive list of eligible securities in the industry.
2. Seamless Integration
   Trade across all segments—Equity, F&O, and Commodities—with a single login.
3. Cost Savings
   Save on interest with zero charges for equity trade (for trade-free youth) and reduced rates for overnight F&O margins.
4. Flexibility and Efficiency
   Tailored haircuts and the ability to use the same collateral across segments make trading smoother than ever.
5. Effective Dec 1, 2024, Kotak Securities has started charging a lower rate of 9%, if 50% of the overnight F&O margin is not available in cash collateral.

Conclusion

Trading with collateral as margin unlocks your portfolio’s potential, letting you trade efficiently without selling your assets. With Kotak Neo’s robust collateral system, you get the flexibility to trade across segments, enjoy zero interest on key trades, and benefit from industry-leading reduced rates for overnight margins.

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