Collateral Benefit

Did you know that shares in your Demat Account with your Best Stock Broker in India can provide limits for your Trading?

The introduction of Peak Margin reporting by the Stock Exchange Board of India (SEBI) took away the trading power of the traders to an extent. The restriction on leverages and high margin requirements made it difficult for retail traders to trade.

Before the regulation, the Stock Brokers used to provide the traders with leverage to enhance the client’s trading experience. However, SEBI’s regulations restricted the brokers to provide clients with any additional leverage or margin.

But, did you know that the investments and savings in your accounts can provide the leverage for trading with your stock broker, as Collateral?

What is Collateral Benefit?

The client can avail leverage against the shares, mutual funds, debentures, bonds, and even Fixed Deposits (FDs) in a Bank Account to trade in your trading account with the best stock broker. This is known as a collateral benefit.

The exchange has a pre-approved list of securities that are eligible for a collateral benefit.
The collateral benefit can be availed against:

● Shares
● Mutual Funds
● Debentures and Bonds
● Government Securities
● Treasury Bills
● Fixed Deposits and Bank Guarantees

Shares, Mutual Funds, Government Securities, Treasury Bills, Debentures, and Bonds in your Demat Account can be pledged with Exchange to avail the collateral benefit.
The collateral benefit provided for trading is against the scripts pledged after the haircut as prescribed by the Exchange.

Let’s understand this with an example.

Mr. Anil has 1,00,000/- worth of shares available in his Demat Account.
Let’s suppose the script is eligible as per the pre-approved list of Exchange and the haircut for collateral benefit is 20%.

In this case, if Mr. Anil pledges the shares with Exchange, he will be able to trade for an additional 80,000/- against the shares available in his account.

Fixed Deposits and Bank Guarantees are considered equivalent to Cash. Therefore, the collateral benefit in the case of Fixed Deposits/Bank Guarantees is 100%.

Why should you avail Collateral Benefit with your stock broker?
The collateral benefit enables you to take advantage of your investments which are kept idle in your account.
That is, you can avail an additional benefit along with the already existing features of the investments.

That is, along with the returns or interest from your shares, debentures, bonds, or Bank FDs, you can also garner opportunities in the Stock Market.


What to take care of when taking Collateral Benefit in your trading with your stock broker?

The benefit of additional leverage against your investments provides you the advantage to take part in the market opportunities. But, this also involves the risk of uncertainties in the market and the charges, like:

● Higher leverage requires you to be cautious while trading.
● Margin Obligations can be considered against your investments. But, the margin is still required to be maintained for the financial debits in the trading account.
● The Financial Debits include the Mark to Market (MTM) Losses, brokerage, taxes, and other statutory charges.
● Read and understand the Risk Management Policies of the Broker.
● The broker may be charging interest on this extra margin against the securities in your account.
● Not all securities are eligible for margin obligations.
● The Exchange has an approved list of shares, mutual funds, and other securities. The broker may also have an approved list as per their RMS Policies.

Collateral Benefit provides you a great opportunity to trade along with fulfilling the peak margin requirements. It provides you a benefit from the investments which are kept idle in your account.

However, utilization of the benefit may vary from stock broker to stock broker as per their RMS and Margin Policy. That is, some stock brokers may not consider 100% collateral benefit after a haircut for margin obligations.

Whereas, some may still provide you 100% Collateral benefit after haircut as prescribed by the Exchange for margin obligations.

The client is only required to maintain funds for financial debits.

Happy Investing