Have you ever heard the term ” Haircut ” while trading or investing and got confused so as to what it actually means? As a trader/investor, each one of us at some point came across this term and had little knowledge about the same. So, let’s understand what this term means. The haircut is the percentage difference between the asset’s market value and the limit you will receive against your collateral (an asset that is kept as security).
In other terms, a haircut is the percentage deducted while allowing a limit on your asset. For instance, say the market value of XYZ asset is Rs. 2000 and the limit you received against it is Rs. 1500, which means the haircut is 25% ((1500-2000)/2000 *100)). The haircut is applied as the lender or the exchange cannot give a loan or credit for the entire value of the asset. Being a trader or investor, you can pledge shares (shares which are not pledged yet) in your Demat account to avail margin.
Key features of the haircut in the stock market
● The haircut value differs for each asset as it is based on the amount of risk associated with the asset class. So, the greater the risk associated, the higher will be the haircut value and vice-versa. Usually, the haircut for equities is higher as compared to gold and debts.
● It is levied to protect the lender in case of failure to repay by customer. Let’s say, you have margin pledged the shares worth Rs. 5 lacs and received Rs. 4.5 lacs after deducting the haircut. And if the share price falls by 20%, then your lender/broker may have incurred a loss. A haircut is applied to protect the lender in such cases.
● Haircut keeps changing depending on the change in the market condition, liquidity and volatility of the asset. For example, if the ABC stock has become too volatile, the lenders may increase the haircut on a particular asset class (E.g.: Shares ABC company).
Variables affecting the haircut value
Some of the variables that may influence the percentage of haircut are
● Nature and type of the asset
● Risks associated with the collateral
● Norms by the regulator
● Collateral’s liquidity
● Other market conditions
Read on to know how some of these factors affect the haircut value.
● If the risk associated with the collateral is less, the haircut will be lower as the lender can be certain that they will easily be able to liquidate the collateral and vice versa.
● In case the asset is highly liquid it is easier to sell it without any loss and thus, a lower haircut will be imposed. Similarly, if the asset is not easier to sell, the haircut applied will be higher
Haircut in Angel One
At Angel One, we offer margin against shares, mutual funds, and SGBs. So, if you wish to increase your margin, you can pledge any of these securities with us. For pledging stocks, we have categorized the scrips into 4 categories, and haircut is levied for each category. Look at the below table for a better understanding.
|Blue Chip||NSE or BSE’s VaR Margin; whichever is higher|
|Good||NSE or BSE’s VaR Margin; whichever is higher|
|Average||Flat 50% of the trade amount or exchange’s VaR Margin; whichever is higher|
|Poor||At Angel One, we don’t offer margin against poor category stocks|
Haircut in share trading is the difference between the market value and value you received against the asset and changes based on the type as well as the volatility of the collateral. So, the next time you plan to put your securities as collateral, check the haircut value beforehand. This will help you in knowing the exact limit you will receive against your collateral. Check the margin available against your holdings here.