If you are a trader or someone who wishes to take up trading, one of the most commonly used terms you will encounter is margin. Margin is the security or the amount you would need to pay your broker before you execute a trade. How much margin you would need to pay is stipulated by market regulator SEBI and is implemented by the stock exchanges in India.
Once you have understood what margin means, it’s time to understand what a margin pledge is. Margin pledge refers to the process where you can use the securities in your demat account to gain additional margin. The securities refer to the ones currently available in your account. You can pledge these much like any other collateral-based loan. Anytime you seek to boost your extra margin, you could do so by pledging and there is no specific timeline involved. This margin helps you to trade in derivative contracts, stocks or even exchange-traded funds (ETFs).
You can submit your margin pledge through your broker’s platform or app by just clicking on the instructions made available through an OTP-based system.
However, this is not the only kind of pledging. There is also MTF pledging. So, what is the difference between the two?
If you buy shares under the MTF facility, you are required to pledge the shares on the very day before 9 pm so as to hold on to the same position. While margin pledge is available against any pledged securities from your demat account, MTF pledge is available against pledged shares only for those shares that are bought under the facility. The benefit of MTF pledge is that the trader can maintain a minimum margin and have a longer holding timeframe.
A big difference between MTF pledge and margin pledge is that the only equity shares that are approved can be pledged in the former, whereas in a margin pledge, approved stocks, ETFs or sovereign gold bonds can be pledged.
While margin pledge gives extra limits against shares, MTF pledge doesn’t allow for extra limits.
Margin trading facility is appropriate for investors who seek to benefit from short-term movement of price but don’t have enough cash balance.
Margin matters because traders can purchase the stocks they wish to invest in on credit. In order to protect the interests of investors, SEBI brought in new pledge rules, wherein pledged shares would remain in the demat account of the client and the investor would need to authorise a request in the broker’s favour. Further, the pledge would have to be approved by the depository before the broker can pledge the shares. The new pledge rules seek to bring the practice of power of attorney (PoA) to an end.
Margin pledge and MTF pledge are two facilities that can be carried out online; the securities that have been collateralised will remain in the demat account till they are sold.
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