What is Collateral Margin?
It would be best to open a Demat account and a trading account for investing in shares. Once the account is opened, you need to transfer the amount you want to invest or trade. Now you can invest or trade to the maximum limit of your funds. However, if you wish to invest more but do not have funds available immediately, you can take a loan from a bank and deploy it for investment. The interest on such loans is very high and a deterrent for you.
There is another option available for stock investors. It is a loan on existing securities, e.g., shares, mutual funds, ETFs, or bonds. These securities are held as a guarantee, and a loan is given by pledging the units. This loan is called Collateral Margin.
In simple words, Collateral Margin is the pledge a shareholder can offer on the shares, bonds, and mutual funds in his Demat account. Against this pledge, an investor can avail a margin amount to invest further.
The shares in the Demat account are held as collateral. The broker offers a pledge margin for additional funds for trading or investing. The broker offers Collateral Margin at his discretion and is not available to every Demat holder.
Why Collateral Margin Is Important?
A collateral margin facility is essential and beneficial for an investor. If you hold securities in Demat that you intend to hold for the long term, you can utilize them for additional investment. The shares lying idle in Demat can earn additional cash for you to invest further. Instead of dipping into your cash savings to invest more, you can unlock the value in Demat holdings. The pledge margin limit against the shares will give you liquidity to invest more.
Benefits Of Collateral Margin
Collateral Margin offers some distinct benefits for an investor:
• You can utilize existing securities lying idle in your Demat account
• You need not dip into your savings for additional investment
• You can make use of any short-term market opportunities using the collateral margin.
• You can use pledge the shares within a short time to take advantage of any intraday trading opportunities
• You can maximize the returns in your portfolio using the available margin pledge on your shares.
• You need not go for an expensive personal loan to invest in the markets.
The process to Obtain Collateral Margin:
The margin against the pledged securities is allotted after deducting a percentage of the value of shares. It means you will not get the full value of securities as a margin. The limit depends on the type of security. Mid-cap stocks will have a lower margin limit as compared to blue-chip stocks. The broker decides the limit - the more volatile the security category in your Demat, the lower the margin. Broker keeps a buffer to counter a fall in security value during market downturns. Not every broker offers collateral margin; you need to ask your broker if they offer a margin pledge.
• You can go to your broker’s website and log in to your Demat page.
• There is an option to allow Pledge the Share against each shareholding.
• These holdings are pledged against margin securities.
A percentage of a share’s value is reduced, also known as a haircut, to allow for volatility and a fall in the price of a security. The remaining value is allotted as a trading limit to the investor.
For example, you have securities worth Rs. 500,000 in your Demat account. Broker may have the haircut of 20%, and the remaining 80% will be allocated as pledge margin, i.e., you will get a trading limit of Rs. 4 00,000 against the shares pledged.
Investors can utilize this pledge margin for further investment and trading purposes only.
In case the shareholder no longer wants to keep his shares pledged or use the trading margin given, he can unblock the shares by releasing the pledge online using the same process.
The process is simple and online; a shareholder can monitor his limit, utilization, interest payable, etc., through his online account.
There is a fee payable for pledging and unpledging the securities every time. Apart from this, the broker will charge interest on the allotted margin amount, which is approx. 0.05% per day
Any action in the Demat account like Dividend, Rights Issue, Bonus, etc., will get activated for the client’s benefit. These do not accrue to the broker as the investor owns the share and final beneficiary.
When you pledge your shares for a margin, those securities are blocked for the time being for any sale. Just like collateral is held with the bank when you avail of a secured loan, the securities act as a guarantee till you pay the margin amount and the full interest. After full payment of pledge margin and interest, the shares can be freely bought or sold.
Is Collateral Margin safe?
SEBI mandated brokers to report all such pledged securities to SEBI last year, considering the investor's interest. This was done to safeguard instances where errant brokers pledged customers’ shares without information to fulfil the margin obligations of other clients. To avoid such situations, brokers no longer hold securities in a common pool to allow any misuse. A broker cannot pledge a client’s security without their permission. The shares pledged by shareholders remain in investors’ accounts only and are flagged as pledged. The broker can’t transfer the shares to any other account. This adds a layer of security and comfort to the shareowner.
Unlike earlier times, a broker can no longer pledge a client’s shares if there is a shortfall of funds for any trade. After the recent regulation by SEBI, the pledging needs to be done by the shareholder himself using his website login. This added step by SEBI has made the process of collateral margin safe and easy to avail with the click of a button.
