January 10, 2024

What are Pledged Shares?

What are Pledged Shares?

Pledged shares refer to stocks that you, as a shareholder, use as a security to get a loan. These shares are pledged with a stock broker or a financial institution. If you can’t meet the repayment terms, the right to sell these pledged shares goes to the lender, typically the stock broker or the institution from which you’ve taken the loan.

Contents:

What is Stock Pledging?

Stock pledging is a process where you, as a shareholder, pledge shares to a lending institution, such as a stockbroker, to secure a loan. Despite pledging the shares, you remain the owner. However, they’re hypothecated to the lender for the loan period.

Let’s say you own shares of a company, XYZ Ltd. If you need funds but don’t want to sell our shares, we can pledge these shares with a stockbroker. The broker then provides you a loan equivalent to a certain percentage of the current market value of the pledged shares.

How Pledging Works?

When it comes to pledging shares, you offer your shares as collateral to a financial institution, usually a stock broker, to obtain a loan. While the shares continue to belong to you, you can’t sell them until the loan is repaid.

For instance, assume you have a significant stake in ABC Limited. You need a loan but don’t wish to sell your shares. In this case, you can pledge your shares to a stock broker. The broker then grants you a loan equivalent to 50-70% of the market value of these shares. This percentage, often known as a ‘haircut,’ is determined by the broker based on the volatility and liquidity of the shares.

How To Pledge Shares? 

To pledge shares using Alice Blue, follow these directions:

Step 1: Visit our Website and click on login on the top right corner of the page.

Step 2: Click on “Backoffice BOT” from the drop-down menu. You will be redirected to a new page.

Step 3: Log in with your credentials.

Step 4: Once you are logged in, click on “Portfolio” →  “Holding” → “Pledge”

Step 5: Tick the scrip which you would like to pledge. Then click on “Pledge” in the right side corner of the page.

Step 6: Enter / Edit the quantity which you want to pledge.

Step 7: Then click on submit and follow the steps to proceed further.

You can raise the ticket from Alice Blue, if you have any doubts.

Alice Blue’s pledging fees are very low. No matter the number of stocks pledged, each buy or sell order will incur a fee of 15 + GST per scrip. Your debit balance will accrue interest at 24% per annum, with interest being deducted from your account daily.

Haircut In Stock Market

In the financial market, a ‘haircut’ refers to the difference between the market value of an asset used as loan collateral and the amount of the loan. The haircut reflects the lender’s perceived risk in lending against that collateral.

For example, if Ms. Patel pledges shares with a market value of ₹1,00,000, the bank might lend her only ₹70,000 against these shares. The ₹30,000 difference, or 30% of the market value, is the ‘haircut.’

Features of Pledging Shares

Pledging shares involves specific traits:

  • Collateral: Shares are kept as collateral against a loan. Despite the shares being pledged, their ownership remains with the borrower.
  • Loan Value: The loan value is a determined percentage of the pledged shares’ market value, usually defined by the lender.
  • Margin Call: If the market value of the pledged shares falls significantly, the lender may issue a ‘margin call,’ requiring the borrower to deposit additional funds or securities.
  • Borrower’s Risk: If unable to meet the margin call, the borrower risks the lender selling the shares.
  • Right to Benefits: The borrower, despite the pledge, retains the right to dividends and voting rights.

Difference Between Pledge and Mortgage

The main difference between a pledge and a mortgage pertains to the possession of the asset. In a pledge, the asset (shares) is transferred to the lender as security, while in a mortgage, the borrower retains possession of the property. 

ParameterPledgeMortgage
Possession of AssetLenderBorrower
Type of AssetMovableImmovable
ExampleSharesReal Estate
RiskAsset can be sold by lender if borrower defaultsLegal process required to take possession of the asset
Transfer of OwnershipNo transfer of ownership to the lenderOwnership transfer to the lender in case of default
PurposeTypically used for short-term financingPrimarily used for long-term financing and property purchases
Registration RequirementNot typically registered with any authorityMortgage is registered with relevant authorities
Repayment TermsUsually repaid upon the settlement of the loanRepaid through regular installments over a specified period
Impact on Credit ScoreA default may impact credit score, but no impact on creditworthinessDefault can significantly impact creditworthiness
CostGenerally lower cost compared to a mortgageMay involve higher costs, such as appraisal and legal fees
Tax BenefitsLimited tax benefitsPotential tax benefits on interest payments and property taxes
AvailabilityAvailable for various assets, including securities and commoditiesPrimarily available for real estate properties

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:

Market What is Primary Market?
Difference between IPO and FPO
Bull vs Bear Market
Trading What is Online Trading?
What is Algo Trading?
Investment What is Bonus Share?
What is Valuation of Shares?
What is Corporate Action?
What is Portfolio in Stock Market?
Difference between Equity Share and Preference Share
Analysis Stock Market Analysis
Individual Topics What are CTT & STT Charges?
India Vix
Difference between FDI and FII
Account What is Trading Account
What is Demat Account

Pledged Shares – Quick Summary

  • Pledged shares are equity shares that a shareholder provides as collateral to secure a loan.
  • Stock pledging refers to using shares owned by an individual as security against a loan.
  • The pledging process involves keeping shares as collateral, determining loan value based on share market value, and potentially facing a margin call if share value decreases.
  • In stock markets, a ‘haircut’ refers to the difference between the market value of an asset used as loan collateral and the amount of that loan.
  • Pledging shares has several unique features, including maintaining dividends and voting rights despite the pledge.
  • A key difference between pledging and mortgage is asset possession; in pledging, the lender possesses the asset, while in a mortgage, the borrower retains it.
  • Invest in the share market with Alice Blue. They provide Margin Trade Funding facility, where you can use 4x margin to buy stocks i.e. you can buy stocks worth ₹ 10000 at just ₹ 2500. 

Pledged Shares Meaning – FAQs

1. What Are Pledged Shares?

Pledged shares are essentially shares that shareholders offer as collateral to secure a loan. They remain in the shareholder’s name, but the lender holds the rights until the loan is repaid.

2. What Are The Rules For Pledging Shares?

The rules include the shareholder and the lender agreeing on the loan percentage of the pledged shares’ market value. The loan-to-value ratio can differ between lenders, which will be part of the pledging agreement. In addition, the shares are not transferable while they are pledged.

3. Can I sell shares if they are pledged?

The shares pledged cannot be sold while they are under pledge. To sell these shares, the shareholder needs to unpledge them, which often involves repaying the loan or satisfying the margin call.

4. What are the disadvantages of pledging shares?

The disadvantages of pledging shares include potential margin calls if the market value of the shares falls. Moreover, if a borrower defaults on the loan, the lender has the right to sell the pledged shares to recover the loan amount.

5. What are the benefits of pledging shares?

Pledging shares allows shareholders to leverage their holdings to secure a loan, while still retaining voting rights and entitlement to dividends. However, this comes with risks and should be done with due caution.

6. How many days can I pledge shares?

The duration of share pledging depends on the terms set by the lender. It can range from a few days to several years, based on the agreement.

7. Is pledging of shares interest-free?

No, pledging shares typically involves an interest cost. The borrower must pay interest on the loan amount the lender provides against the pledged shares.

8. Do we get a dividend on pledged shares?

Yes, as a shareholder, you are entitled to receive dividends on pledged shares unless specified otherwise in the agreement with the lender.

9. Is pledging of shares good or bad?

The decision to pledge shares depends on individual circumstances and financial goals. Pledging shares can provide liquidity for short-term funding needs, but it carries risks, such as potential loss of ownership in case of default. It is advisable to evaluate the pros and cons and seek professional advice before deciding.

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