What is Pledging?

Listen to our Podcast: Grow your wealth and keep it secure.

0:00 / 0:00

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.

Open a Demat & Trading account with Bajaj Broking

How does the pledging of shares work?

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.

Why Promoters Pledge Shares?

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.

What is a haircut?

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.

Advantages of Pledging Shares

  • Pledging involves obtaining a secure loan from the lender against the shares you own. Availing of secured loans is simple and they also attract low-interest rates compared to unsecured loans.
  • Access to additional cash for various financial requirements, such as margin for trading or other financial needs is one of the key advantages of pledging shares.
  • If an investor pledges shares, there is no tax liability associated with it.
  • Pledging does not require the borrower to sell these shares. This means that if the markets are increasing the investment value also increases, and at the same time it also provides additional cash to the investors. Additional benefits like dividend income also stay intact and borrowers receive the benefit of it.

Disadvantages of Pledging Shares

  • A disadvantage of pledging shares is the risk associated with it.
  • If the borrower defaults on the loan where shares are pledged as collateral, the lender may sell the shares in the market to recover the loan amount.
  • The selling of shares by the lender for the high net-worth investor may lead to a further collapse in the prices of these shares, affecting other shareholders in the process.
  • If the promoter of a company defaults on loans where shares are pledged as collateral, this can leave a negative impression of the company and its share prices can be impacted negatively for extended periods.

How do investors or promoters pledge shares?

  • The investor or promoter has to submit a request for pledging shares using a terminal.
  • After receiving a request from the investor, the terminal forwards the request to National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL).
  • The National Securities Depository Limited or Central Depository Services Limited authenticates the request via email or mobile to verify the PAN or BO ID.
  • Once the request is approved, the collateral margin is available for trading to investors and promoters.

Conclusion

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.

Share this article: 

investment-card-icon

Exchange Traded Funds (ETF) - Meaning And How Do They Work?

Trading accounts facilitate market access, enabling buying, selling, and managing of shares for investment growth, trading and diversification.

investment-card-icon

Difference Between Online Trading and Offline Trading

Online vs Offline Trading: Learn how online trading offers convenience, lower fees & real-time information, while offline trading relies on brokers & manual processes.

investment-card-icon

Benefits of Online Trading

Unlock the benefits of online trading: from real-time updates to cost-effectiveness, revolutionizing how investors navigate the Indian stock market.

investment-card-icon

What is Day Trading

Day trading in India: A comprehensive guide to understanding the stock market segments and the importance of a Demat and Trading account.

investment-card-icon

4 Key Benefits of Intraday Trading

Discover the advantages of intraday trading, such as risk mitigation, profit potential in bear markets, leveraging opportunities, and the platform for continuous learning.

investment-card-icon

Momentum Trading

Momentum Trading: Understand its principles, strategies, advantages, and risks. Learn how to ride the waves of stock price movements.

investment-card-icon

Short Covering and Short Squeeze

Understand the concept of short covering and its role in mitigating losses for short sellers. Know how to spot signals, understand short squeezes for trading success.

investment-card-icon

How to Calculate Stop Loss in Intraday Trading?

Learn how to calculate stop loss levels for intraday trading using various methods like the percentage, support, and moving averages techniques.

investment-card-icon

Day Trading for Beginners

Day trading for Beginner: Open a trading account, research stocks & grasp market fundamentals for successful trading. Learn top strategies employed for day trading.

investment-card-icon

What is Range Trading: Definition, Types & Strategies

Gain insights into range trading strategies and techniques for consistent profits. Learn how to navigate market movements and manage risks effectively.

FAQs

Can I open multiple demat accounts?

Answer Field

Yes, you can open multiple demat accounts but only under the below conditions:

  • You can open only one demat account per DP using the same PAN card.
  • You can open multiple demat accounts with different DPs using the same PAN card.

No results found

Our Secure Trading Platforms

Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading

Bajaj Broking App Download

7 Lac+ Users

icon-with-text

4.3 App Rating

icon-with-text

4 Languages

icon-with-text

₹ 3800 Cr MTF Book

icon-with-text