For many investors, holding shares in a Demat account is a convenient and secure way to hold their securities. However, not all investors know that these shares can also be used as collateral to get a trading margin. Collateral margin allows you to pledge your existing shares, bonds, or mutual funds as security to increase your trading capacity without having to invest additional cash.
In India, where stock market participation is increasing rapidly, the concept of collateral margin provides a smart financial option for those looking to make the most of their assets.
Let us take a look at how collateral margin works, its benefits, and the steps involved in using shares in your Demat account as collateral.
What is a Collateral Margin?
A loan given by a broker to an investor with the shares in their Demat account serving as collateral is known as collateral margin. Those who have already opened a Demat account and have securities in it are eligible for this option.
Investors have the choice to pledge these securities to enhance their trading limits by gaining a margin instead of selling them. For those who wish to profit from short-term trading opportunities without selling their holdings, collateral margin is an effective approach.
How Does Collateral Margin Work?
Once you have opened a Demat account and want to trade beyond your available funds, you can use your shares as collateral. For example, if you have shares worth ₹3,00,000 in your Demat account, your broker may take a haircut of 20%, leaving you with ₹2,40,000 as collateral margin. This margin can then be used to trade securities, giving you more liquidity without the need to deposit additional cash into your trading account.
Benefits of Using Collateral Margin
- Maximising Idle Securities: If you hold securities that you do not intend to sell in the near future, collateral margin allows you to unlock their value for trading or investment purposes. This way, your assets continue to earn returns without being sold.
- Avoiding Personal Loans: Instead of taking out expensive loans to increase your trading capital, you can use the collateral margin facility. Interest rates on personal loans are usually high, but collateral margin offers a less expensive alternative.
- Using Short-Term Opportunities: The stock market often presents short-term opportunities. You can take advantage of these by using collateral margin instead of selling your long-term holdings.
- No Impact on Ownership Benefits: Even when your shares are pledged, you remain the legal owner of the shares. Any dividends, bonus issues, or rights related to the shares continue to benefit you, not the broker.
Is Collateral Margin Safe?
The safety of collateral margin has always been a concern, but recent regulations by the Securities and Exchange Board of India (SEBI) have made the process more secure. Brokers are now required to report all pledged shares to SEBI, and clients must initiate the pledging process themselves. This step was introduced to prevent brokers from pledging clients’ shares without their knowledge, which was a common malpractice in the past.
The Process of Pledging Shares
To use the collateral margin feature, you must first open Demat account. Once your account is open, the process of pledging shares is very simple:
- Log in to Your Demat Account: You can access your account through your broker’s website.
- Select Shares to Pledge: Choose which shares you want to pledge. Remember that the broker will apply a haircut to account for volatility in share prices.
- Pledge the Shares: Confirm the pledge, and the broker will assign a margin based on the share value following the haircut.
- Monitor Your Margin: Once the shares are pledged, you can use the margin for trading. You can monitor the margin, interest charges, and other details through your broker’s app/website.
- Release the Pledge: When you no longer need the margin, you can release the pledge by paying off any outstanding dues. Once the payment is complete, your shares will be available to trade or sell again.
Conclusion
Using collateral margin against shares in your Demat account can be an effective way to increase your trading capacity. It allows you to unlock the value of your existing holdings without selling them, providing liquidity to take advantage of short-term market opportunities. However, this feature comes with its own set of risks, especially if market conditions cause the value of the pledged shares to fall.
If you are planning to open a Demat account and learn about the benefits of collateral margin, make sure you find a broker who offers this service and has transparent terms.
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