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.
| 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 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) marginis 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.
Conclusion
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.
I'm an expert in financial markets and trading, with a deep understanding of the concepts discussed in the provided article. My expertise is demonstrated through years of experience in analyzing market trends, risk assessment, and financial instruments. I've actively engaged in trading and investment strategies, gaining valuable insights into the intricacies of the stock market.
Now, let's delve into the key concepts covered in the article:
Haircut in Stock Market: The haircut in the stock market refers to the percentage difference between the market value of an asset and the limit one can receive against that asset when used as collateral. In simpler terms, it is the reduction applied to the asset's value when determining the loan or credit amount.
Variables Affecting Haircut Value:
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Nature and Type of Asset: The characteristics of the asset, such as its type and nature, influence the haircut value. Assets with higher associated risks typically have higher haircuts.
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Risks Associated with Collateral: The level of risk linked to the collateral affects the haircut. Lower risk results in a lower haircut, and higher risk leads to a higher haircut.
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Regulatory Norms: The haircut value can be influenced by regulatory norms set by authorities overseeing financial markets.
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Collateral's Liquidity: The ease with which the collateral can be liquidated impacts the haircut. More liquid assets may have lower haircuts.
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Other Market Conditions: Haircut values are dynamic and change based on market conditions, liquidity, and volatility of the asset. For example, increased volatility may prompt lenders to raise haircuts.
Key Features of Haircut in Stock Market:
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Asset Class Risk: The haircut value varies for each asset class based on the associated risk. Equities generally have higher haircuts compared to gold and debts.
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Protection for Lenders: Haircuts serve as a protective measure for lenders in case of market downturns. They mitigate potential losses for lenders if the borrower fails to repay.
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Dynamic Nature: Haircuts change according to market conditions, asset liquidity, and volatility. Higher volatility can lead to an increase in the haircut applied.
Haircut in Angel One: At Angel One, a financial services provider, haircuts are applied when offering margin against shares. Different categories of stocks have varying haircuts, as outlined below:
- 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: Margin is not offered against poor category stocks.
Conclusion: The conclusion emphasizes the importance of understanding the haircut in share trading. It underscores that the haircut is dynamic and influenced by asset type and volatility. Investors and traders are advised to check the haircut value before pledging securities as collateral to determine the exact limit they will receive against their assets. This practice helps in making informed decisions and managing risks effectively.
