VMPL
New Delhi [India], October 28: There are two ways of buying shares as a trader or investor. One is through adding cash to your trading account, and another is through margin. When you use your shares as collateral, your broker can extend you a line of credit to buy new shares through margin. In margin trading, you can use the money obtained from keeping your shares as collateral to buy new shares.
However, you can secure a loan too by keeping your owned shares as collateral. This process is called shares pledging. Investors can use this loan to fulfil their various financial needs. Thus, shares pledging can become a convenient way of accessing your investments without having to redeem them.
What Is Shares Pledging?
Investors pledge shares (keep them as collateral) in equity trading as a guarantee that they will repay the loan. This makes the loan secure for your lender, as they can sell the shares in case you fail to repay the loan. In shares pledging, the lender has the authority to sell the pledged shares to recover their outstanding loan repayment amount in case of a default.
Also read about mahurat trading.
What Is The Difference Between Margin Trading And Pledging Of Shares
The two strategies, margin trading and shares pledging might sound similar, but have these key differences. Check the table below:
What Is The Process Of Shares Pledging
The shares pledging process is simple. You just need to place a pledge request, wait for the assessment by the lender and wait for loan approval and disbursement.
Let us look at this process in more detail:
Step One - Analyse Your Loan Requirement
It would be helpful to make an account of your financial goal and the lending amount connected to it. It is also important to look at the real cost of goals (inflation adjusted cost) to be sure of the loan amount to be secured through shares pledging.
Being sure about the loan amount is essential, as you won't be able to sell your pledged shares unless your loan is settled. Similarly, if you are unable to repay the loan, the lender can sell your pledged shares amounting your outstanding loan. Therefore, investors can start with analysing their actual loan requirement.
Step Two - Choose A Lender
Your lender can be your bank, broker or a Non Banking Financial Company (NBFC). You need to look for aspects like the interest rates on various types of loans, ease of loan processing, documentation requirements and more. This also depends on your chosen demat account or broker.
You can open free demat account using a popular stock market app to make shares pledging simple.
Step Three - Submit Loan Application
So, once you have chosen a lender, you can go ahead and place your loan application. In recent times, this process has become digital and hassle-free.
The loan application form is available with the lending institution. You need to enter your personal information like your name, address, date of birth, occupation or profession in the form. You also have to fill in your reason for seeking a loan and the loan amount at the appropriate sections, respectively.
Step Four - Submit Verification Documents
You need to submit the necessary documents, which can typically include the following:
Tour identity proof (PAN card, Aadhaar card, Driving licence and more)
Address proof
Income proof (your salary slips, bank statements)
Demat account statement
Shares pledge agreement
You need to read the documentation requirements with your lender carefully. At times, verification might be required along with digital submission of documents.
Step Five - Wait For Valuation And Approval By The Lender
The lender needs to match your loan amount with the value of your pledged shares. For this, they need to analyse the market value of your pledged holdings.
Once you have made the loan application and submitted the documents, the lender will move towards the next step. They will assess the market value of your pledged shares to determine the loan amount they can offer. If your application is approved, the lender will disburse the loan amount to your account.
Step Six - Pledge Agreement
Once your pledge agreement is approved, you will need to sign a pledge agreement outlining the terms and conditions of the loan. This would include the interest rate, repayment schedule, and consequences of default. Investors must read this agreement properly, because it lists the terms, conditions of loan and consequence of default.
What Is The Eligibility Criteria For Shares Pledging
To pledge shares in India, you generally need to meet the following criteria:
Demat Account: You must have a demat account with a registered depository participant (DP) in India. There are various types and brands of demat accounts available to investors. You can compare demat accounts and choose the best online trading app.
Eligible Securities: The shares pledged must be eligible for pledging as per the regulations of the Securities and Exchange Board of India (SEBI). If you have already pledged your shares somewhere, you would not be able to pledge them again.
Minimum Value: There may be a minimum value requirement for the shares pledged, depending on the lender's policies. You can read the terms and conditions and pledging policies of your broker for the same.
Market Value: The market value of your shares keeps changing due to short-term market volatility. If the market value of your shares decline, you might have to pledge additional shares as per the lender and broker policy. The market value of the pledged shares should be sufficient to cover the loan amount and any applicable margins.
What Are The Other Aspects To Check While Pledging Shares
In the earlier point, we discussed the market value and the impact on your pledged shares. Similarly, there are more aspects to consider before pledging shares. They are as follows:
Margin Requirements: Lenders may require you to maintain a certain margin, which is a percentage of the loan amount. This ensures that the value of your pledged shares remains sufficient to cover the loan. Thus, you need to maintain the margin at all times.
Early Repayment: Some lenders may charge a prepayment penalty if you repay the loan before the agreed-upon term. Therefore, you need to check the lender terms and conditions given in the pledge agreement.
Tax Implications: The interest paid on the loan may be tax deductible under certain circumstances. Therefore, seeking tax consultancy can help you save taxes on your income using the pledging interest amount.
Conclusion
Pledging of shares is a simple and convenient way to grasp beyond your goals without having to redeem your investments. So, while your investments are growing, you are simultaneously meeting your financial goals with the leverage you gained by pledging your share holdings.
(ADVERTORIAL DISCLAIMER: The above press release has been provided by VMPL. ANI will not be responsible in any way for the content of the same)