What are haircut charges in trading?

A "haircut" is not a fee you pay; it is a percentage reduction in the value of your pledged collateral. However, brokers do charge a nominal pledging fee (e.g., ₹20-50 per request) to process the pledge with the depository.

How is a haircut calculated?

Haircut in stock market is determined according to factors like price volatility, volume, trading activity, and security credit risk. The exchanges and brokers analyse these risks and then apply a certain percentage of reduction on the market value in order to determine the amount of collateral margin that can be used.

What do you mean by a 10% haircut?

10% haircut in stock market means that the value of a security pledged as collateral is decreased by 10%. For example, if the stocks are priced at ₹1,00,000, then only ₹90,000 will be the usable margin and the rest will be the safety cushion for price fluctuations.

Why is it termed as haircut 100?

A haircut 100 in stock market means a total haircut of 100% on the security, thus its value as collateral is dropped to nil. They call it this way because the entire value is “cut off,” usually due to factors such as extreme volatility, illiquidity, or regulatory restrictions.

Haircut: What it is and how it works?

In the stock market, a haircut is a percentage discount applied to the market value of pledged assets to determine the amount of collateral that may be used as margin. It serves as a risk buffer for brokers and exchanges against unexpected price volatility.

Investors can pledge shares, ETFs, bonds, or other qualified securities without selling them, with the post-haircut value serving as collateral. Higher-risk or low-liquidity assets attract higher haircuts, while stable assets, such as liquid ETFs, may attract lower haircuts.

Key Takeaways

Haircuts protect brokers from price volatility by reducing the value of pledged collateral.

Haircut rates range from 5% for bonds to 100% for risky penny stocks.

Securities are "locked" to provide margin without losing ownership or dividend

SEBI regulations often require that for overnight F&O positions, at least 50% of the margin requirement must be in cash or cash equivalents (like Liquid ETFs/SGBs).

What is a Haircut in the Stock Market?

Haircut in the stock market refers to the percentage reduction in a stock's market price when it is used for margin trading. This cut-off acts as a safety net for brokers against price fluctuations and unexpected market downturns.

For instance, if the stock is worth ₹100 and a 20% haircut is applied, then only ₹80 is treated as a margin. Haircut percentages differ according to the risk involved: stable blue-chip stocks generally incur 12.5%–20%, while speculative penny stocks may even incur 50%–100%.

Safer instruments, such as liquid ETFs or government bonds, typically have haircuts of about 5%–10%, which in turn leads to better margin availability.

How Does a Haircut in the Stock Market Work?

In the equities market, a haircut is a risk-management technique that reduces the value of an asset when it is used as collateral. Additionally, it provides brokers and lenders with protection against potential price fluctuations.

How it Works?

Haircut in the stock market is through collateral pledging, thus enabling traders to utilse shares as margin instead of disposing of them.

Pledging: You choose certain shares from your dematerialised account to pledge. A lien is placed, you keep the ownership and dividends, but are unable to sell without getting the lien unpledged.

Valuation: The broker prices the shares, taking the previous day’s closing price as a basis.

Deductions: If the shares worth ₹1,00,000 are subject to a 20% haircut, ₹20,000 is subtracted.

Margin Credit: The remaining ₹80,000 is credited to your trading account as Collateral Margin. This can be used for Intraday or Futures & Options (F&O) trading.

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 the haircut value and vice versa. Usually, the haircut for equities is higher than for gold and bonds.

It is levied to protect the lender in case of failure to repay by the customer. Let’s say, you have margin pledged the shares worth ₹5 lacs and received ₹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.

Haircuts keep changing with changes in market conditions, liquidity, and asset volatility. For example, if the ABC stock has become too volatile, the lenders may increase the haircut on a particular asset class (E.g., shares of the ABC company).

Variables affecting the haircut value

Some of the variables that may influence the percentage of haircuts 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 Charges in the Stock Market

The haircut fees in the stock market are discounts on the valuation of securities used as collateral. They are considered a risk cushion for brokers, safeguarding them against market fluctuations. In case you put up shares worth ₹1,00,00, the application of a 20% haircut implies that you will be able to use only ₹80,000 as your margin.

The main figures are as follows:

Asset Rates: for the top companies and banks’ stocks, the haircut is between 12.5% and 20%, while for the above-mentioned small stocks, it might even reach 100%

Fees: If you want to pledge your securities, you will have to pay a one-time fee between ₹15 and ₹30 plus taxes, depending on the value of the security. (This is broker-dependent and not a market/regulatory standard)

Shortfall: For collateral usage, SEBI and exchanges require that 50% of margin obligations be met from cash or cash equivalents, while the remainder can be met by pledged securities. Otherwise, an interest charge or penalty applies.

Conclusion

A haircut in the stock market is a very important risk-management measure that ensures the stability of the market as a whole and the leverage traders can use. It lowers the value of the collateral based on its volatility, preventing defaults that would have spread across the system during a sudden market crash. So, the next time you plan to put your securities as collateral, check the haircut value beforehand. This will help you know the exact limit you will receive against your collateral. Check the margin available against your holdings here.

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 a haircut is levied for each category.

Look at the table below for a better understanding.

Category	Haircut
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 the exchange’s VaR Margin, whichever is higher
Poor	At Angel One, we don’t offer margin against poor category stocks

Note: VaR (value at risk) margin is given by the exchange and is used to estimate the probable loss of value of a share/portfolio on the basis of historical trends and volatilities.