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Pledging of shares in simple terms means taking a loan against the securities you own. It is a popular way of raising capital for individuals and companies, to meet their working capital requirements, clear existing debt etc.
A share pledge means taking a loan against the shares in possession. In the process of pledging, companies, promoters, and individuals do retain their ownership of the shares.
A pledge meaning indicates keeping something as collateral.
Pledging allows investors to trade in high volumes as they have access to higher capital. Pledge meaning in the share market is to keep shares as collateral. Individual investors also pledge shares to obtain debt from banks or financial institutions to fund their trading margins.
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Through pledging of shares, investors give their shares as collateral to meet their financial requirements. Pledging of shares is common for investors who haveshares worth high value in their holdings. The share value keeps changing, and so does the collateral value as there are constant fluctuations in the market.
By pledging shares, investors can avoid losing trade opportunities if they have low cash margins. The collateral margin is received after a percentage deduction called a haircut. The collateral margin availed through these pledged shares, could be used for futures, equity trading, and options writing. For more insights, install the Bajaj Broking App.
Promoters pledge shares to meet their various financial objectives. Usually, share pledging is treated as one of the ways raising funds in emergency situations. Loans are lent by the banks by keeping shares as collateral.
A haircut margin in the case of pledging shares is to safeguard the interests of the lender. A haircut margin is the difference amount between the actual value of the shares against the collateral value.
Let us assume, as an investor you are pledging shares with an actual value of Rs. 10 lakhs as per its current stock prices. The collateral value of these shares will be less than 10 Lakhs. The lender may provide a collateral value of let’s say Rs. 8 Lakhs. This means that the haircut percentage is 20% in this case.
The lender does this due to the volatile nature of the stock market. If the share prices fall rapidly in an event, the lender may suffer significant losses if they don’t keep the haircut percentage.
Pledged shares meaning is to take loans against the shares that you hold as an investor. For promoters, pledging acts as a last resort to raise funds for various financial needs of their organisation. For individual investors, pledging can be a recourse strategy to invest in the market and not lose any profits. It also enables investors to trade in high volumes as it unlocks higher margins for them. Investors and promoters can get the best benefits of pledging shares with better due diligence in terms of planning and strategizing this activity.
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