Haircut is a normal activity for which everyone usually go every month. However, In stock market it has a different meaning.
Haircut in stock market is the percentage of shortfall among a stock's market price and the amount that can be given as collateral for a loan.
The haircut value will be determined by the degree of related risk to the lender when the collateral is pledged. The higher the risk, the higher the haircut value, & vice versa.
if you pledge Rs.10 lakhs in Stocks and the lender provides you Rs.9.50 lakhs, he will lose a money if the stock drops 20% tomorrow. Haircut was utilised to cover such risks.
When an investment is used as collateral for a loan, it is given a haircut, which is a discount from its market value.
The haircut is mostly determined by the actual asset's risk. Higher haircuts are applied to riskier investments.
In both the Indian and global contexts, the haircut for stocks is typically 50%.
Margin is a term used frequently in the stock market. It allows investors to leverage and participate in transactions without assuming a significant risk.
Pledging stock and giving haircut in stock market is not a good idea for beginners. We recommend not to use this option until you are a pro trader.