Intra-day traders are well aware of liquidity problems that restrict their ability to trade. You may have stocks in your portfolio but are unable to take advantage of profitable trading opportunities because of a lack of liquid funds. Well, what if we told you that you could pledge your shares for margin? Continue reading to learn more about how pledging of shares for margin can help intraday traders.
What is Margin Pledging?
Through a process known as “margin pledging,” investors can offer their stock holdings as security in exchange for a loan from their broker. In other words, it is a service offered by stock brokers to their clients, allowing them to buy or sell securities without having to pay the full purchase price or the full share price upfront.
Example of margin pledging
Let’s look at an example to get a better grasp on the concept at hand: let’s say you are a wealthy investor who has accumulated Rs 20,00,000 in the form of shares of Tech Mahindra Ltd, HDFC, and Eicher Motors Ltd.
Now, you are presented with a glorious trading opportunity, but you don’t have the money to take advantage of it. And so Person X took you to pledge your stock portfolio. The broker takes a haircut, or 20% of the entire value of my stocks as determined at the current market price, which comes to Rs 40,000, and provides Person X with the remaining value, Rs 1,60,000, as a collateral margin that Person X can use for trading opportunities. The 20% that Person X took was for securing the exposure.
Margin Pledging: What You Should Know
Pledging can generate a margin for intraday trading in the cash segment, futures, and options. The stock’s collateral will be based on the lower of the stock’s LTP or its previous close, and its value will be adjusted in real time for the haircut.
The margin cost fluctuates from day to day based on the market value of the equities you pledge. Each pledge request will incur a nominal fee plus GST. Similar fees apply for withdrawing a pledge.
“Un-pledge” and “invocation”
After learning the definition of pledging, you may be wondering, “Can I get my stocks back after pledging?” The term “un-pledge” describes the method by which this is possible. Reclaiming pledged shares from a broker is called “un-pledge.”
It’s important to keep in mind that even if you are pledging your shares, your stocks will remain in your DEMAT account and you’ll continue to be able to receive dividends, bonuses, etc., as usual.
As part of the invocation process, a broker’s risk department sells clients’ pledged stocks to offset losses.
For clarity, if the stock’s market price were to drop dramatically, the broker would ask for more margin in the form of additional shares, cash, or other collateral; if the investor/user were unable to supply this additional margin, the broker would (very unlikely) have to activate the shares.
Although the margin pledge facility, an additional service offered by some but not all brokerages, presents a great opportunity for investors to build wealth, extreme caution is advised.
Conclusion
Pledging your shares is a great way to ensure you never miss out on online share trading opportunities. You can unpledge your shares when your trade works out or you get liquidity from someplace else. However, pledge wisely and do not overleverage yourself; it might cause you trouble.
Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.
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