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Share trading is perhaps the only investment option that lets you invest a higher amount than you have put into your account. The facility of getting an extra amount for trading is known as the collateral amount in Demat account.
If you want to buy equity futures or trade in futures and options, you need to deposit some funds into your trading account. However, when your funds fall short of the purchase or sale value, you can avail of a loan from the broker. The loan is known as the collateral amount. The collateral amount depends on the broker. While some brokers offer collateral, others do not like risks and hence, do not offer the collateral facility.
To avail a collateral amount in Demat account, you must have some shares in your Demat account. The stockbroker keeps the shares as collateral to provide you with the margin required to trade efficiently.
Collateral Amount in Demat Account
In simple terms, collateral amount refers to a loan your stockbroker gives you when you need additional funds for trading stocks, futures, options, or commodities. The collateral amount, also known as collateral margin, depends on the value of the shares in your Demat account and the available cash in your trading account.
Just like you approach a lender when you need a loan, you need to approach your stockbroker and request them to offer you a collateral margin. The broker does not give you a cash amount against the shares you pledge, unlike a lender. Instead, they increase your trading limit to allow you to purchase more shares than you can. Like a lender, your stockbroker charges an interest rate for providing you with the collateral amount.
When you avail of a collateral amount in Demat account, you cannot sell the shares you have purchased with the collateral amount until you have repaid the collateral amount and interest in full. After repaying the collateral amount and the interest, your stockbroker releases the shares, and you can freely sell them to transfer the profits to your bank account. However, if you cannot repay the collateral amount along with interest, the stockbroker can sell your shares and recover the amount.
What are the Top Benefits of Collateral Amount in Demat Account?
The collateral amount can give an edge to your trading activity. However, you need to trade cautiously since you have to return the collateral amount sooner or later. Here are the top benefits of trading with the collateral amount in Demat account:
1. Higher Purchasing Power - With the collateral amount, you can purchase more shares than your account balance can afford. You can make a fortune by investing a fraction of what it takes to be rich.
2. Make Your Shares Work For You - The collateral facility lets your idle shares work for you. Since the stockbroker pledges the idle shares, you can use the amount to make even higher profits.
3. Maximise the Interest Rate - The collateral amount in Demat account enables you to maximise the interest rate. The higher profits you make, the higher the effective rate of interest.
4. Tackle Volatility Better - If you are proficient in predicting volatility, the collateral amount can let you profit from it. Since collateral amount increases your buying power, you can use it to ride the market waves and increase your profit margin.
What Happens if You Do Not Make a Profit With the Collateral Amount?
While you can strike gold with the collateral amount when your bet goes in the direction you anticipated, you may lose a considerable amount if it goes in the opposite direction.
You can use collateral in two ways - intraday or delivery. When you trade intraday, the stockbroker looks at the cash available in your account to provide you with a collateral margin. If you buy and sell on the same day, you have to settle the shortfall (if any) on the same day to avoid penalty. But, if the trade goes to T+1 or more days, the shortfall (if any) must be settled on the date of the sale. However, if you profit, the stockbroker deducts a minor fee as interest and transfers the remaining amount to your trading account.
What are the Prerequisites of Availing of Collateral Amount in Demat Account?
To get the facility of the collateral amount in Demat account, you need to fulfil certain criteria:
1. Maintain Enough Cash - The collateral amount is calculated based on the cash available in your account. Hence, it is wise to maintain a decent amount in your trading account at all times to avail of the collateral margin.
2. Factor in the Haircut - Haircut refers to the amount deducted from the current market value of the shares in your Demat account. The stockbroker gives you the collateral amount after deducting the haircut. The haircut would reduce the broker's risk if the price of the pledged shares decreases.
3. Know the Uses - You can use the collateral amount in Demat account to buy equity shares, futures, options, or commodities. You cannot use the amount to purchase mutual fund units, bonds, or money market instruments.
Open a Demat Account to Get the Collateral Facility to Increase Your Profit
To avail of the collateral amount in your Demat account, you need to open a Demat account. 5Paisa provides free low-brokerage Demat and trading account to eligible investors. All you need is a stable internet connection and a few documents like a PAN card, an Aadhaar card, a cancelled cheque, and a photograph.