A collateral amount is a form of loan against shares offered by a broker to their clients for trading in stock and shares. It is a form of an additional value-added service provided by a few brokers in India, and not all brokers offer this additional service due to the risk associated with it. In simpler words, it is providing shares in your Demat account as collateral to increase your trading limits.
Collateral in the Demat account is beneficial for both a client and the broker. Investors (Demat account holders) can use their idle shares in their Demat account which they do not intend to sell in the near future as collateral with their broker. This enables them to obtain a margin against their financial assets lying idle in their Demat account instead of cash to increase their trading limits. The broker charges an agreed upon rate of interest for this service.
How does collateral margin work?
For instance, a Demat account holder wishes to trade in shares but is short of liquidity; they can provide their idle stock as collateral to their broker, who provides them with a loan in the form of enhancing trading limits at an agreed upon rate of interest.This allows the Demat account holder to trade without having to spend more cash for trading securities.
The Demat account holder can release the collateral upon releasing payment to the broker. In the event of failure to make a payment, the broker can sell the shares and recover the capital.
Is collateral benefit provided on the shares kept in the client’s Demat account?
Yes, the Demat account holder is provided with a collateral benefit for stocks held in their Demat account. According to guidelines, Demat account holders are required to maintain a certain percentage of cash margin of the value of the collateral to avail such a benefit.
What happens if a Demat account holder does not release or withdraw their shares held as collateral?
When a Demat account holder marks a collateral hold upon their shares held on T-day, they can release the hold on the same day itself, if they have not taken any position on or against the said share. In such a case, these shares will be released into the Demat account on the same day.
For T+1 day and beyond, the account holder can fully or partially withdraw these shares, subject to the availability of margin. The shares shall be released into your Demat account by day’s end.