Collateral margin against shares in demat account
A collateral sum is a type of loan backed by securities that a broker provides to their clients for stock and bond dealing. It is a form of additional value-added service provided by a few brokers in India; however, it is not available from all brokers due to the risk involved. To put it another way, it's raising your trading cap by using shares in your Demat account as leverage.
The collateral in a Demat fund benefits both the client and the broker. Investors (Demat account holders) will use their new shares in their Demat account as collateral with their broker if they do not plan to sell them short. It allows them to raise their trading caps by obtaining a margin on their financial assets sitting unused in their Demat account rather than cash. For this operation, the broker charges an agreed-upon rate of interest.
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How does collateral margin work?
For example, suppose a Demat account holder wants to sell securities but lacks liquidity. In that case, they may use their unused stock as leverage to get a loan from their broker in the form of increased trading limits at an agreed-upon interest rate. It allows the holder of a Demat account to exchange shares without having to pay extra cash.
After making payment to the dealer, the holder of a Demat account will release the collateral. If a deposit is not made, the broker can sell the stock and recoup the money.
Is there any collateral gain on the shares owned in the client's Demat account?
Yes, the owners of a Demat account receives a collateral value on stocks kept in their account. According to guidelines, Demat account holders must retain a certain amount of cash margin of the value of the collateral to apply for this advantage.
What happens if a Demat account holder does not release or withdraw their shares held as collateral?
If a Demat account holder puts a collateral hold on shares owned on T-day, they will lift the hold the next day if they haven't taken any position on or against the stock. These shares will be published into the Demat account on the same day in this situation.
The account holder may totally or partially withdraw these shares on T+1 day and beyond, subject to margin availability. The shares will be released into your Demat account.