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The stock market keeps hitting uptrends and downtrends. According to the stock market, there are lots of opportunities to invest in it, and this volatility is a part of investment in stocks and other financial assets. After the pandemic, the share market seems to have periodic ups and downs. However, due to advanced technology and instant settlement, it is possible to trade with extra cash. For this reason, you can try the collateral amount, which is extra cash provided by the brokerage firm to trade in the stock market.
A collateral margin can be a game changer, but you need to open a Demat account to obtain a collateral margin. By opening a Demat and trading account, you can be eligible to trade in the stock market. For a novice trader, it is important to know the stock market and its functionality. The collateral amount in your Demat account is important before you trade on the margin money.
The digitisation of stock makes trading quick and safe with multiple security encryptions. So, if you want to invest in equity futures or even trade in a commodity market, it is important to have some funds in your trading account. However, when you are short in making a trade to get extra funds, you can also get an instant loan as a collateral loan from a broker. This loan is also known as the collateral amount.
When you equip yourself with all these prerequisites of online trading, you can trade in much higher capital through experience and informed decisions. You must not follow any stock tips or advice without any prior analysis or research on company stock.
Table of Contents
How Does the Collateral Margin Work?
Now that we know what collateral margin is, we must learn about the functionality of collateral margins. Collateral in the Demat benefits the broker as well as the investor. The broker often adds some charges and interest in the collateral money. So, if a person has idle shares in their Demat account, then these shares can be inactive as collateral. In the margin trade, an investor trades; subsequently, it is risky and rewarding for traders. The result of these trades is that an investor doesn’t need to spend more cash.
When an investor wants to release their collateral shares, they can simply release these shares from the broker through repayment of the margin amount. But if you fail to make the repayment, then it simply results in the broker selling your shares in the stock market in order to recover the amount.
Can the Collateralling of Shares Be Profitable?
According to the SEBI guidelines, it is mandatory to maintain a minimum margin, according to which you can get a good amount of collateral funds. Therefore, as a Demat account holder, you enjoy the benefits of getting funds for trade against your financial holdings.
But to process this margin fund, the broker must follow a procedure and open a margin account. A margin account is a standard account, but it comes with a process to verify your income proof and rectify an agreement about the margin trading. The minimum deposit or balance is known as the minimum margin.
Advantages of Collateral Margin
Extra money, if traded in profit, can provide you with better returns. But you need to be aware that extra money comes with additional responsibility. Some of the advantages of collateral margin trading are as follows:
- With better funds, you have the power to purchase more financial assets. You can make a profit from a fraction surge of financial assets.
- If you find a potential stock, you must wait for the store to work.
- If you understand the market volatility, it can be a plus point for your trade. By using margin funds, you can gain better returns.
Risk Associated with the Collateral Amount
To become eligible for trading with the collateral funds in your Demat account, you first need to open a margin account. To fulfil these criteria, remember the following things:
- Enough Cash: A collateral amount is based on the calculated money from the cash in your trading account. Having a good amount of money in your trading account is important to get a better collateral margin.
- Haircut value: A haircut is an amount deducted from the current market value of shares in your Demat account online. Any stock broker will provide you with the collateral after deducting the haircut amount. The reason for deducting the haircut amount is to reduce the risk to a broker if the price of the pledged shares falls.
- Limitations: With the collateral funds, you can trade in the equity market, commodities, futures, and options. You do not get to use this amount to invest in bonds, mutual funds, or other market opportunities.
As a trader, you must know that a Demat account holder marks a collateral hold on the shares on trading day. So, you get to release the amount on the same trading day. If you have not taken any position, then for intraday trade, all the shares will be parked in your Demat account.
In the case of a T+1 day trade or more days, the account holder can fully or partially withdraw their shares held in place of the margin amount. A share shall be released into your Demat account by the day’s end.
Conclusion
A collateral fund is a leverage that the trader holds against their shares. It is in the form of extra funds to leverage your trade and grow your portfolio if managed properly. Each broker in India has a different type of interest rate for the margin against their financial assets. But as a Demat account holder, you must be aware of the terms and conditions before taking any loan from your brokerage firm.