Pledging of Stock Holdings – Know the Pros and Cons
Published by Sharekhan Education | January 6, 2023
Pledging of Stock Holdings – Know the Pros and Cons
By Fahim Ansari | Sharekhan Education
Pledging refers to borrowing money against one’s stock holdings. Shares are a kind of asset. They serve as security for loans. Any shareholder may pledge their shares, whether an individual or a company. People generally pledge assets to obtain working capital for business purposes or to meet personal financial requirements.
If you need funds for any purpose, you can use this method to get quick credit facilities without paying any interest on loans taken from banks or financial institutions. However, there are certain risks, pros and cons involved in pledging.
Risks of pledging shares:
➢ Risk of an unexpected rise in equity prices causing a loss for lenders
➢ Risk arising out of changes in value due to changes in earnings/expenditure pattern
Pledging by Investors:
Pledging shares allows investors to engage in higher volume trading. When investors purchase shares, their savings become trapped in their trading accounts, with funds frozen and unusable for new trades despite owning shares as assets. As a result, shareholders pledge the shares in their Demat account, known as Margin Against Shares.
You can’t sell shares or vote on resolutions when you pledge shares. You also don’t get dividends and other benefits associated with being a shareholder. Pledging your shares allows you to receive cash but doesn’t give you ownership. If the company goes into liquidation, you will not receive a buyback offer, and they will not be able to pay out any rights issues in their lifetime (unless .
Pledging by Promoters:
A company’s promoters can pledge shares to obtain money for various goals. Companies can raise capital by requesting loans, issuing debt, or issuing new equity. Companies obtain loans by putting up shares as collateral to cover their operational needs. People utilize it to fulfill various purposes, including financing other endeavors, meeting working capital needs, paying debts, etc.
Advantages of pledging shares include:
➢ The ability to secure a loan without having to sell shares
➢ The ability to continue to hold and trade the shares
➢Using the shares as collateral for a margin loan has the potential to generate income from them.
Disadvantages of pledging shares include:
➢ Possibility of the shares being sold if the loan is not repaid
➢ Potential for the value of the shares to decline, which would result in a loss if the shares were sold to repay the loan
➢ They may be subject to a “lien,” which gives the lender the right to sell the shares if the loan is not repaid.
Requirements for pledging shares include the following:
➢ The shares must be owned outright, with no outstanding loans or other debts against them
➢ They must be held in a brokerage account
➢ Major shares must be listed on a major stock exchange
To get further knowledge about stocks or stock trading enroll for attend our Free Power Money Workshop.
By Enrolling in this stock market course, a learner can learn the basics and the various aspects of trading in Futures and Options trading.
