Collateral Amount in a Demat Account

The collateral amount in your demat account can enhance your trading capacity and opportunities. By pledging the shares and securities you hold in your demat account as collateral, you can borrow funds from your stockbroker. 

Using this facility in case of any fund shortages helps you expand your trading limit and grow your wealth. With this additional liquidity in hand, you can carry out trading and investing activities without any hassles. 

The collateral amount in a demat account works on the following basis:

• You can borrow funds from your broker against the demat shares you hold in the account by pledging your existing demat shares

• The broker calculates the value of your shares and adds the equivalent funds to your trading account

• You can use this collateral amount to buy more equity shares or derivatives 

• The broker applies a nominal interest rate on the provided collateral amount in exchange for the facility

• The pledged demat security is locked in your account and you cannot trade it until you repay the borrowed amount

• You can unlock your assets after paying the total amount, inclusive of interest charges

• If you default on the dues, the broker can sell your securities to recover the collateral amount

Here are some benefits you could enjoy with a collateral margin:

• You could substantially increase your purchasing power 

• You can make use of the idle shares available in your demat account to earn better profits

• Your pledged shares are secure in your account 

• You can take calculated risks and invest toward growth

• You can earn higher returns on your capital

• You can leverage short-term market fluctuations for profits

• You can make the most of low interest rates levied on a day-to-day basis, unlike other credit options

Additionally, with lower interest rates, you can have a higher profit margin on the collateral amount. However, this feature of demat accounts is limited to only some brokers. 

After all, the transaction can turn out to be risky if the pledged demat shares do not cover 100% of the total margin amount. So, enquire about the collateral margin from your broker before opening a demat account.

While this facility increases your purchasing power and provides funds to trade, there are some risks involved. To counter those risks, here are a few conditions to remember when utilising this option:

• You must maintain a certain percentage of the fund in your trading account, which is calculated depending on your collateral

• Brokers do not provide 100% of the current market value of the pledged demat security to combat the risk of non-payment

• A certain percentage of the pledged demat value is deducted to reduce the risk, known as the ‘haircut amount’

• By taking the haircut amount into consideration, you can evaluate the maximum value you can get on your collateral margin

• You can only use the collateral amount to invest in equity shares, commodities, and futures and options

• You cannot use the amount to invest in mutual funds, bonds, or any other money market instruments