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Why Should You Trade On Collateral Margin

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In India derivative stock/index trading is done on cash. Frankly its foolish. Do you know future and option shorting can be done free of cost? By free of cost I do not mean that you do not need cash to trade futures and option selling – you need. But you can easily use this money to buy quality stocks and keep in your demat account and ask for collateral margin from your broker and trade futures and options with that money without bringing extra money in your trading account.

What Is Collateral Margin?

In technical terms is it should be called Margin on Collateral. Basically the invested stock is used as a collateral (asset) to give margin (loan) to trade to the owner of the collateral.

What is collateral?

Collateral is a property or other asset (here other asset is stocks in holding), that a borrower offers as a way for a lender (the broker) to secure the loan (margin). Suppose you lose money more than the collateral amount given to you by the broker then the broker has every right to sell your shares and recover the loss. Since collateral offers some security to the broker they allow a loan to their customers to trade derivatives. These collateral comes at a lower interest than normal personal loans.

Please note that for Group A stocks (large caps) most brokers give 80% collateral margin. It can go down for volatile stocks. Please consult your broker for collateral margin rules. Every broker has different collateral margin rules. Since the rules are different for every stock broker I cannot write a defined rule here. Only thing I can say is that some brokers charge a fees for collateral margin money. Make sure to know all terms and conditions before asking for collateral margin.

However most brokers do not charge any fees if you use only 50% of the collateral margin – anything above that is considered as a loan and charged a small fee. So its better you read the full terms and conditions before asking for collateral margin.

One good stock (Disclaimer: This is not a recommendation to buy or sell. Please do your own research before investing in this stock) is HDFC Bank. It is a fundamentally strong company unlikely to fail. This is one stock that you can keep for life.

These kinds of stocks are called All Weather Stocks. Whatever happens to stock markets these stocks will keep giving good returns over the long term. These kind of stocks come under the Warren Buffett style of investing. He has once said in an interview that – “Our favorite holding period is forever.” This what you should do with a few stocks.

You must stay invested in good stocks until you retire, ask collateral margin on them and trade options conservatively with proper hedge so that you keep making monthly income that comes for free apart from the dividends you get from these quality stocks.

Frankly I have summed up how you should invest and trade and make good money in small steps, accumulate them by the time you retire or in 10 years time in stock markets. Then either leave your job or do whatever you want. Rest is plain noise that’s going on about stock markets in media – Television and Online world. Unfortunately people follow the myth about the stock markets told in golden words and get trapped to lose money.


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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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