While you trade in shares to generate returns on your investment, do you know that you can also pledge your shares as a collateral asset?
Shares are considered assets that have the potential to generate returns for shareholders. That is why it is possible to pledge shares and get a loan against it. This is where the concept of share pledging comes into the picture.
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Share pledging is an activity wherein you can pledge your equity shares or units of an owned Exchange-Traded Fund (ETF) to get a collateral trading margin. You can use this trading margin to trade more and capitalize on potential stocks.
Share pledging is also called Margin Trading Facility, wherein you can pledge your shares as collateral and buy other stocks using the margin money you get against the collateral.
When you pledge your shares, you do not get an amount equal to the market value of the pledged shares. The lender might suffer a loss if the market value falls. As such, in pledging, the amount you get as a loan is lower than the market value of the pledged shares. The difference between the loan amount and the actual market value is called a 'haircut'.
In other words, a percentage value is deducted from the value of the pledged shares to arrive at the loan amount. This percentage deduction is called a 'haircut'.
The haircut value is different for different stocks. It depends on the riskiness of the stock being pledged. If you pledge risky stocks whose market values might fluctuate considerably, the haircut is higher, and the loan amount is lower. The reverse is true for stocks that are established and stable in the market.
For example, say you pledge shares worth ₹10,000, and the lender offers you a loan worth ₹8000. Here, ₹2000 would be the haircut. Alternatively, if the lender has a haircut of 20% on stock A and you pledge stock A worth ₹10,000, you would get a loan of ₹8000.
The margin is credited to you depending on when you pledge your shares. Usually, if you pledge your shares before 3:30 pm, i.e., within market hours, you get the margin by the next trading day. However, if you pledge your shares after the market closes, i.e., after 3:30 pm, the margin is credited the day after.
The maximum number of shares of different companies you can pledge simultaneously depends on your broker. Every broker has a different policy regarding the maximum number of shares that can be pledged at any time. So, check with your broker to find the maximum limit.
You might not be able to pledge your holdings for various reasons. These include the following:
The charge of pledging varies across stockbrokers. Each broker has a different pricing policy. For instance, Motilal Oswal allows pledging any scrip at ₹20 plus GST. You can pledge any number of the scrip at a minimal charge. However, if you pledge more than one scrip, the charge will apply to each scrip.