What is Margin Pledge & How Does It Work?

What is Margin Pledge: A stock market is a place where individuals will find a lot of opportunities that can help them increase their wealth.

But while being involved in the market, you might have come across situations where there is an investment opportunity that has the potential to give you huge returns, but you have already invested your capital in some other securities.

But what if I told you there was a way to earn these additional gains through a margin pledge? In this article, we will be discussing what is margin pledge and how the Margin Pledge works.

What Is Margin Pledge?

Margin pledge is a process whereby individuals can pledge their stocks to their brokers in exchange for a collateral margin that can be used for trading. 

Based on the pledge provided by the individuals, the brokers give a margin to the individuals through which they can execute their trades. Here the margins are provided by the individuals in the form of cash or by depositing securities.

Let us now understand what is margin pledge with the help of an example:

Suppose an individual comes across a trading opportunity but is unable to seize the opportunity due to a shortage of funds. But the individual owns Rs 4,00,000 worth of shares in his Demat account. 

What the individual here can do now is pledge his/her shares to the broker. The broker deducts a percentage of the haircut of say 20% from the total value of stocks that is based on the current market price which amounts to Rs 80,000 and the remaining value of Rs 3,20,000 will be provided by the broker as a collateral margin which can be used by the individuals for trading opportunities.

Here, the haircut percentage refers to the amount collected by the brokers to cover the risk they are exposed to if the collateral share prices move erratically. Also, the securities provided as margin are referred to as “Collateral”.

How Does Margin Pledge Work?

As per August 1, 2020, SEBI guidelines, stock brokers can accept collaterals of securities only in the form of margin pledge created on the securities held by clients in their Demat account.

Clients or persons holding the power of attorney can give instructions in physical form or electronically through SPEED-e to create margin pledge on securities.

Such a margin pledge may be created in favor of a stock broker’s specifically designated Demat account. (opened as Trading Member – Client Securities Margin Pledge Account or Trading Member / Clearing Member – Client Securities Margin Pledge Account).

How To Submit Margin Pledge Instructions?

Margin Pledge Instructions can be submitted in three ways:

1. You can fill up, sign, and submit the “Margin Pledge Form- Form 43” in physical form to your Depository participant
2. If you are a registered user, you can electronically submit the Margin Pledge instructions using the NSDL SPEED-e platform.
3. If you have given the Power of Attorney to your stock broker (who is a trading member). They can initiate the margin pledge instructions on your behalf. Here, you will be required to verify the Margin Pledge instruction using the OTP that is sent to your registered email address or registered mobile number.

Who Is A Pledgor And Pledgee?

A pledgor is a person who deposits security as collateral for the fulfillment of a contract or the payment of debt

A pledgee is a person to whom the pledge is given or to whom the debt is owed.

Points To Be Noted While Creating Margin Pledge 

1. Margin pledge instruction will become effective after the confirmation of the pledgee.
2. If the confirmation of pledge instructions is automated by the pledgee, the margin pledge instructions created will immediately come into effect.
3. For the purpose of margins, individuals must make sure to create a margin pledge for securities that are approved by their stockbrokers
4. Individuals should create a margin pledge for quantity based on the security’s value and haircut applicable.
5.  No transfer, hold, pledge, hypothecation, lending, rematerialization, or alienation of securities in any manner shall be allowed after the creation of a margin pledge on securities until the margin pledge on securities is released or invoked.

Closure Of Margin Pledge

1. Submitting Closure Instruction: Instruction for Closure of Margin Pledge existing in their Demat account can be submitted by the clients in physical form or electronically through SPEED-e.
2. Confirmation by Pledgee: Pledge will be closed upon the confirmation of the concerned stock broker (pledgee TM)
3. Instruction by Broker: Alternatively, the stockbroker can instruct for the unilateral closure of the pledge. 

Invocation Of Margin Pledge

A stock broker can send instructions for invocation of a pledge existing in its favor in physical form or electronically through the SPEED-e facility in the event that the customer defaults on payments.

The securities will be debited from the client’s Demat account and credited to TM’s Demat account upon the successful completion of the invocation.

Also Read: How To Use Market Depth For Intraday Trading?

In Closing

In this article, we discussed what is margin pledge, how it works, instructions for margin pledge submission, closure of a margin pledge, and Invocation of a Margin Pledge.

Margin Pledge can be a good way to earn benefits from the stock market without paying the full amount. But, individuals have to be aware of the leveraged risk that comes along with margin pledging and also the risk associated with stockbrokers selling your stocks when you are unable to repay the margins.

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