What is a Demat account?
A demat account offers a wide range of features and services. For one, you can now make use of idle shares lying in your portfolio for intraday trading. You can pledge shares or margin against shares in your Demat account to conduct intraday trading.
Simply put, margin against shares is a loan on your shares – a facility – that is offered by a stockbroker on an agreed interest rate. This facility is a value-added service that offers investors to make use of the shares in their Demat account and obtain the finances required to conduct trading activities. Margin against shares is also referred to as collateral margin.
Well-known and reputed stockbrokers such as Kotak Securities offer this facility to customers who hold shares in their Demat accounts as long-term investments. This facility can help investors use their shares as collateral for the loan. Ideally, stocks that are not traded actively and have been unused for an extended period of time can be used as an asset to gain money. Hence, if you need immediate cash for the intraday trading activity, you could consider using the idle shares and obtain the margin against the shares to trade.
If you are short of liquidity and wish to trade in shares, you can approach your broker and get this loan without having to get cash from elsewhere in order to trade in securities. Brokers provide this collateral benefit on the shares maintained in your Demat account.
As an active investor in the stock market, you would be aware of what is demat account and its various uses. Now, to obtain cash against shares, a specific percentage of cash margin of the value of the collateral would be needed to get margin against shares. Although brokers to do not charge for using the facility of margin against shares, there is a fee involved for off-market share transfer from your account to the beneficiary account of the broker. Depending on the charges of the depository participant you may be requested to pay the fees.
It is important to note that even after you transfer the shares to your broker for the collateral margin, you continue to remain the owner of the shares. However, you may not be able to sell the latest shares until they are redeemed. At the same time, you stand to benefit from our corporate actions including voting rights, dividend payouts, bonuses, rights issues, stock split and others.
In the event that an investor experiences losses after using margin money, the broker holds the right to make use of the shares that are pledged for the losses. In some cases, investors do not make profits by trading in futures and options and are unable to meet the required mark to gain additional capital. As such, the broker can sell the shares and compensate for the losses.
Depending on what securities you can pledge as margin against shares you may want to check the list of securities with your broker. Brokers offer margin against shares only on some securities and are not all shares. Hence, it is a good idea to check your holdings and speak to your broker on the kind of shares that can be pledged as collateral.