Pledged Shares Meaning – Instant Loan on Shares in Demat Account?

pledged-shares-meaning

What does the word ‘pledge’ remind you? Pledge of Independence, right? As a child, we would recite National Pledge in school assemblies and public events, especially on national days. We pledge our devotion to the country.

What does it have to do with the stock market?

In the stock market, we pledge our shares with a broker or a lending institution to earn more from the stock trading. There are some rules that we have to abide by. 

Promoters of a company can also pledge their shares. They pledge their shares with banks and NBFCs to get some loans. They can unpledge it when they are in a position to pay back the loan. 

Read on for more details. 

Content:

What are Pledged Shares?

Investors pledge their shares/demat holdings with a broker to get the cash margin also known as collateral margin. The collateral or cash margin can be used to trade in Equity Intraday, Futures, and Options Trading. 

You should be careful if you are pledging your demat holdings towards margin requirements. In case of a sudden slump in the market, you could be in a soup. You would owe a lot to the broker.

How does pledging work? And key points to keep in mind are explained below. One of the important points is to understand the concept of haircut in pledging.

What is Haircut in the Stock Market?

When a lender lends against the pledged shares, it maintains a margin of safety, that is, the loan value would always be lower than the market value of the pledged shares. 

A haircut is a difference between the market value of the pledged share and loan value. Lenders do that to absorb market volatility so that if there is a free-fall in the stock market, they can invoke the margin call. 

It means either they will sell the shares in the market or the investors will be required to make up for the eroded value either by paying in cash or by pledging additional shares. Haircut, thus, is a safety net that cushions against the fall in the pledged shares. 

For example, if you pledge stocks worth Rs 1,00,000, the lender may extend a loan of Rs 70,000 or 70 percent. It is the loan to value. The remaining Rs 30,000, or 30 percent, is the haircut. 

The haircut percentage varies from one lender to another. It also depends on the volatility of the shares pledged as collateral. The haircut in the case of equities will be higher than that in the case of government securities. 

How to pledge shares in Alice Blue without POA?

Pledging shares in Alice Blue is pretty simple and straightforward and can be done without POA. Unlike other brokers where you have to submit the POA and wait until EOD just to get the OTP for authorization.

  • Login to the BOT Application.
  • Click on ‘Request’ and select ‘Holdings Pledge’.
  • Click on the ‘Pledge’, Enter the ‘Quantity to Pledge’, and Click on ‘Submit’.
  • You will be redirected to CDSL authorization Page, enter the OTP and click on ‘Verify’.
  • Collateral margin will be available in your trading account in T+2 days.

Charges for Pledging Shares in Alice Blue

The pledging charges in Alice Blue are the lowest when compared to the top brokers in India.

  • ₹15 + GST per scrip on every buy and sell order irrespective of quantity of stocks pledged.
  • The interest of 24% per annum on debit balance, but interest charges will be deducted from your ledger on a daily basis.

List of Approved Shares for Pledging in Alice Blue

Check out the comprehensive list of approved Shares, ETFs, Government Securities, and Mutual Funds for pledging here.

Don’t have an Alice Blue Demat Account yet? Open it Now for Free in just 15 Mins and get benefits worth ₹ 5000!

Quick Summary

  • Investors pledge their shares/demat holdings with a broker to get the cash margin also known as collateral margin. 
  • The collateral or cash margin can be used to trade in Equity Intraday, Futures, and Options Trading. 
  • When a lender lends against the pledged shares, it maintains a margin of safety, that is, the loan value would always be lower than the market value of the pledged shares. 
  • A haircut is a difference between the market value of the pledged share and loan value.
  • Pledging shares in Alice Blue is pretty simple and straightforward and can be done without POA. Read the complete procedure in the article above.
  • The pledging charges in Alice Blue are the lowest when compared to the top brokers in India.
    • ₹15 + GST per scrip on every buy and sell order irrespective of quantity of stocks pledged.
    • The interest of 24% per annum on debit balance, but interest charges will be deducted from your ledger on a daily basis.
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About Author

Vikas Yadav

Vikas Yadav is a professional writer who also happens to be an engineer. He's been creating content for quite some time now, but it was his fascination and zeal for the stock market that steered him in the right direction. He is eager to spread knowledge about the "power of investment" through his collaboration with Alice Blue by creating high-quality educational content for the public at large. If you want to comprehend difficult subjects in simple terms, he's your man.

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