Let us say you have purchased shares of a blue chip company and the stock has appreciated substantially in the last few years. You can surely book your profits and come out of the stock but you are extremely bullish about that stock and want to hold on to it. Is there any way you can monetize these shares without selling it out. Let us look at 5 such possibilities:
Using the demat value of the shares as margin for trading
This is the simplest method of monetizing your shares without actually selling them. Typically, your broker will allow you to take a margin trading position in the equity or even the F&O segment based on the value of your demat holdings. This is a trading position and hence must be played with strict stop losses and profit targets only. Normally the broker will consider a haircut before giving the margin and the haircut is normally around 50%. That means if the market value of your share holding in the demat account is Rs5,00,000 then you can get a margin up to Rs2,50,000. There is an important aspect here. Ensure that you measure the risk you take on your trading and that you are able to pay up the losses in cash. Else, the broker will sell your share holdings to recover the losses in trading. This is something you need to be extremely cautious about.
Getting a loan against your shares (LAS)
If you don’t want to do trading, you can also get a loan against shares (LAS). Normally, your broker has a tie-up with banks or NBFCs who can give you the loan. The normal haircut is 50% of the market value of the shares. The haircut may be higher in periods of volatility in the markets. When you take LAS, you will have to hypothecate the shares to your lender. There are two risks you need to be conscious of. Firstly, if you fail to repay the loan on time then the financer is at liberty to sell the shares and recover the dues. Therefore, you need to pay the loan on time to hold on to your shares. Alternatively, if the price of the share crashes sharply, then the financer will call for additional margin. If you are not able to put the additional margin then the financer could sell your shares to cover their risk.
Creating cash-futures arbitrage to earn the spread
This is a fairly low risk method of making money out of your shareholdings. The way it works is you sell equivalent futures of the same stock against your cash holding. For example, if you are holding 2,000 shares of Reliance Industries, then you need to sell equivalent futures. There is a catch here. You can create this arbitrage in multiples of the lot size. For example, one lot of RIL is 1,000 shares so only if you hold in multiples of 1,000 shares can you do a cash-futures arbitrage. Typically, the cash-futures spread vary between 0.50% and 0.80% per month. Once the arbitrage is created, the short futures are rolled over each month and the positive roll spread becomes your earning, even as you continue to hold the shares.
Sell higher options to keep reducing your cost of holding the stock
This is a slightly more aggressive strategy, where you sell slightly out of the money call options on the stock which you are holding. This strategy is adopted when you do not foresee a very sharp rise in the price of the stock during the interim period. Hence you will use the call premium earned to reduce the cost of holding of your stock. Remember, this is a risky strategy since there is no protection on the downside. On the upside, normally traders put a stop loss on the short call option in case they do not intend to sell the shares. This strategy is normally followed by HNIs. While the rates of return could vary depending on volatility and market conditions, you need to be wary of the risk in this strategy.
Consider stock lending of these shares
This is a new opportunity that has cropped up for investors. When you are holding on to shares and do not want to sell them, you can look at lending these shares for a fee. The stock lending happens through the exchange mechanism and hence it is entirely risk-free. Also, since the shares are not sold, there are no capital gains implications in this case. Why would investors borrow shares? Typically, traders could borrow shares for two reasons.
They may want to short shares due to a bearish view, but they may not be holding those shares. Since rolling settlements only permit intraday short selling, they can borrow shares and sell them. Secondly, there are others who could have sold shares without delivery and could be looking to avoid auction losses. They are also candidates for stock lending. You can explore such opportunities and strategies using a share market app.
The crux of the matter is that there are a variety of ways to monetize your equity shares without selling them. You can take you pick based on what suits you best!
I'm a seasoned financial expert with extensive experience in capital markets and investment strategies. I've navigated through various market conditions, adapting and optimizing portfolios for maximum returns. My expertise spans across diverse financial instruments, including equities, derivatives, and alternative investment strategies.
Now, let's delve into the concepts discussed in the article about monetizing shares without selling them:
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Using Demat Value as Margin for Trading:
- This method involves using the demat value of your shares as margin for trading in the equity or F&O segment.
- The broker provides a margin, typically around 50% of the market value, allowing you to take trading positions.
- Caution: Strict risk management is essential, as the broker may sell your shares to cover losses if you can't pay in cash.
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Getting a Loan Against Shares (LAS):
- You can obtain a loan against your shares from banks or NBFCs, typically with a 50% haircut on the market value of the shares.
- Risks include potential sale of shares if the loan is not repaid on time and the need for additional margin if share prices drop sharply.
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Cash-Futures Arbitrage:
- Involves selling equivalent futures of a stock against your cash holding, typically in multiples of the lot size.
- The positive roll spread from rolling over short futures becomes your earnings, allowing you to continue holding the shares.
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Selling Higher Options to Reduce Holding Cost:
- Involves selling slightly out-of-the-money call options on the held stock to generate premium income and reduce the cost of holding.
- Risky strategy without downside protection, but some traders use stop-loss orders on short call options.
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Stock Lending:
- Investors can lend their shares for a fee through the exchange mechanism.
- Risk-free process with no capital gains implications, as the shares are not sold.
- Borrowers may short shares for a bearish view or avoid auction losses from selling shares without delivery.
In conclusion, the article outlines diverse strategies for monetizing equity shares without selling them, offering flexibility based on individual preferences and risk tolerance. It's crucial for investors to carefully assess and choose the strategy that aligns with their financial goals and risk appetite.
