What is Pledge Margin and How to Use it for MTF

In case you’re new to stock market trading and investments, you might have come across the term Pledge Margin. Understanding pledge margin could be advantageous, particularly if you wish to grow your capital without any liquidation of your holdings. 

What is Pledge Margin?

Pledge margin allows you to use your current/existing stocks, mutual funds, and other eligible securities in the Demat account as collateral for securing additional trading margins. Meaning, you can borrow funds against your holding value, thereby leveraging existing investments for more trading. Upon pledging your existing shares, the broker will give you a loan against their value, which you can use for trading. 

Traders usually resort to this facility to buy additional shares, trade in futures and options, do intraday trading, etc. This system gives you ample flexibility to expand your trading positions without having to deposit more cash instantly. For example, if you have stocks that are valued at around ₹200,000, then you could get a margin of roughly ₹1,70,000 against the same. 

How to Pledge Your Holdings?

Here is an example of how you can pledge your holdings by initiating a margin pledge request on Groww. 

Step 1: Open your Stocks Balance section. Then click on pledge balance

You can also view access Pledge on Groww via your stock holdings. 

Step 2: All stocks eligible for pledging from your total holdings will be displayed on the screen. Select the stock you wish to pledge and click on Verify Pledge. 

Step 3: Edit the stock quantity that you wish to pledge (Here you can view the total margin that you are eligible for and the haircut that is levied in total)

Note: No interest or charges are applicable to the usage of pledged margin.

Step 4: Click the Verify Pledge button and enter the OTP that you receive post which the All Request screen will be displayed. Check your pledge status in the order details menu thereafter. 

Note: Remember that all stocks are not eligible for pledging- only those with approval by the broker and exchanges may be pledged. 

Read more about the Pledging feature on Groww here: https://groww.in/blog/new-feature-alert-pledging

How to Place MTF Orders via Pledge Margin

Thanks to Pledge Margin, you can now place MTF orders even when you do not have adequate cash. Another notable advantage is that you can avoid margin shortfalls as well.

The pledged shares will act as collateral if your trades necessitate a higher margin owing to volatility (a fall in the last traded price), an increase in the haircut, or a mix of both. This will help you maintain proper margins and prevent any auto square-offs for your MTF positions. You can thus avoid liquidating your holdings for meeting the margin requirements.

Note that market volatility or price drops in the pledged shares are scenarios where you may still have to encounter margin calls. Not meeting them may lead to your positions being liquidated. 

To place an MTF (margin trading facility) order through Pledge Margin, you will have to buy shares via MTF and then pledge them prior to 9 PM on the same day. 

How can Pledge Margin be used to meet margin requirements and avoid margin shortfall?

Pledge margin helps you use existing securities as collateral for meeting the margin requirements and avoiding shortfalls. You can use the margin or loan to trade in multiple instruments and the broker will keep tracking the market value of these pledged shares. Additional margin may be needed in case the market value comes down. You may un-pledge shares once you do not require the margin. 

Thus, you can leverage the existing investments without having to sell them and maintain flexibility all along. However, note the haircut or percentage deduction applicable for the value of your pledge securities to cover market risks. If the market value of these pledged shares falls, you may get a margin call for depositing more funds or liquidating your position. 

How Are the Cash Balance and Pledge Margin Utilized

In case both pledged margin and cash balance are present, brokers may usually follow a specific order of utilization -

The pledge margin is used first, followed by the cash balance. Charges may apply in this case for using pledge margin.

When MTF orders are placed using the pledge margin, there will be interest charged on the total amount that you’ve borrowed from Groww and the pledged margin.

In case there is a MTF loss, then the cash ledger will go negative and the pledged holdings will be squared off if the loss is not added in GB. 

In many cases, the pledged margin covers the margin requirement for the open positions, while the cash balance may be used for further withdrawals/trading, mostly for instruments like F&O (futures and options). The pledged margin will not be seen as cash in the account statement, although it will keep fulfilling the margin obligations. 

Ramifications

Here are some possible ramifications of pledge margin or margin pledging. 

• Keep track of interest charges
  Whenever MTF orders are placed via pledge margin, there is interest charged for the amount borrowed and the pledged margin used in the entire duration for which the position is open. 
• Maintain the margin coverage suitably
  Remember that market movements are swift and hard to predict. In case your pledged shares fall in terms of their value, then your available margin may also come down. To maintain your MTF positions, make sure that you have an adequate margin buffer in the account. 
• Have a strategy for volatile markets
  In case there are dynamic stock market movements or persistent volatility, keep reviewing the values of your pledged stocks and all open MTF positions to stay ahead. 
• Understand what can be pledged
  Pledging may only be available for select listed stocks that have approval from the broker and exchanges. ETFs, mutual funds, and many other instruments are not eligible as of yet. 

Final Notes

Using pledge margin strategically will give you more purchasing power and flexibility, without hindering your long-term investments as well. However, staying alert and informed is the need of the hour along with actively tracking your positions. In fact, this facility can not only help you expand your portfolio, but also diversify it across multiple offerings/products, although you should keep an eye on the risks of margin calls and potential losses of assets that have been pledged.