Since share prices are vulnerable to sudden market fluctuations, a sufficient balance in your trading account could help you trade without any interruptions. In some cases, you may require additional funds to seamlessly make transactions in the stock market.
To cover this fund shortage, brokers offer a collateral margin against the idle stocks in your Demat account. You can understand the collateral margin meaning by comparing it with secured loans which are offered by banks.
Brokers offer funds against your pledged stocks, which you can use to continue your trading activities. Read on to learn how this collateral amount works and the conditions to get a collateral margin.
In online trading, the collateral amount refers to the funds you can borrow from your broker against the Demat shares you hold in the account. To get the required funding, you can offer any of your existing Demat shares to the broker.
After calculating their value, the broker will add the equivalent funds to your trading account. You can use this collateral amount to buy more equity shares or derivatives. This allows you to continue trading hassle-free without worrying about arranging additional funds.
In exchange for this facility, the broker applies a nominal interest rate on the provided collateral amount. The pledged Demat security is locked in your account and cannot be used for trading until you repay the borrowed amount.
Once you have paid the total amount, inclusive of interest, you can unlock your assets. However, if you default on the dues, the broker can sell your securities to recover the collateral amount.
Now that you know the answer to the question, “what is the collateral amount?”, learn of its advantages.
Here are some benefits you could enjoy with a collateral margin.
You could substantially increase your purchasing power
You can make use of the idle shares available in your Demat account to earn better profits
Your pledged shares are secure in your account
You can take calculated risks and invest toward growth
You can earn higher returns on your capital
You can leverage short-term market fluctuations for profits
You can make the most of low interest rates levied on a day-to-day basis unlike other credit options
Additionally, with lower interest rates, you can have a higher profit margin on the collateral amount. However, this feature of Demat accounts is limited to only some brokers.
After all, the transaction can turn out to be risky if the pledged Demat shares do not cover 100% of the total margin amount. So, enquire about the collateral margin from your broker before opening a Demat account.
While the collateral margin increases your purchasing power and provides emergency funds to help you trade seamlessly, there are some risks involved. To counter those risks, here are a few conditions to remember when availing this option from any broker.
You must maintain a certain percentage of the fund in your trading account, which is calculated depending on your collateral amount
Brokers do not provide 100% of the current market value of the pledged Demat security to combat the risk of non-payment
A certain percentage of the pledged Demat value is deducted to reduce the risk, known as the ‘haircut amount’
By taking the haircut amount into consideration, you can evaluate the maximum value you can get on your collateral margin
You can only use the collateral amount to invest in equity shares, commodities, and futures and options
You cannot use the amount to invest in mutual funds, bonds, or any other money market instruments
Considering these conditions and advantages, you can make a calculated decision on when to opt for a collateral margin on your Demat shares. With the collateral amount, you can boost your buying power, but be sure to read the terms and interest rates offered by the broker.
In addition to the collateral margin, there are many benefits of opening a Demat account, such as security and easy access to trading. You can open an instant Demat account by following a few simple steps on Bajaj Finserv Markets, with zero charges. Visit the platform or download the app and explore a plethora of investment options.
Brokers charge a nominal interest on collateral margins, usually at around 0.05%. However, these rates depend on the broker's policy and the collateral amount.
Yes. A collateral margin is credit that you can get for trading in equity shares and futures and options. Through a collateral margin, you can avail funds by pledging your Demat securities.
You must repay the collateral amount and interest to the broker even if there is no profit. If you fail to pay the due amount, the broker has the right to sell your shares to recover the collateral amount.
It is a risky undertaking but it allows you to take a calculated risk. This is because availing collateral margin, while beneficial, puts you at risk of losing your shares. Maintaining the required balance and repaying the borrowed amount on time can prevent such a scenario from occurring.