What is pledging?

Zerodha Zerodha trivia
1

Why do people pledge? What is cost of pledging? Can margin from pledging be used for buying more stocks, buying/selling F&O?

Can margin from pledging be used for buying more stocks, buying/selling F&O?

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Hi trader,

Pledging is giving your stocks as a security for a loan. Similar to how you pledge gold jewelry to get a gold loan. In our context, people pledge with us to get margin which can be used for trading.

At Zerodha, pledging costs Rs.60 per scrip/stock irrespective of the quantity. So what this means is if you have 100 shares of Reliance in your demat, you pledge it, you are charged Rs.60. there’s no charge fro unpledging it. So the total cost of pledge+unpledge is Rs.60 per stock.

If you pledge the same stock multiple times, each time you pledge, the cost will be Rs.60. So if in the above example, you pledge 50 stocks first and then the next 50 after a few days, you pay Rs.60 + Rs.60.

When you pledge, you get a collateral margin. Since it is a margin and not cash that you are getting, you can use it only for products where margin is blocked. So essentially to trade futures (both buying/selling) and trading options (only shorting/writing). To buy options, exchanges ask for cash, hence this margin can’t be allowed for buying options. Similarly exchanges ask for cash to buy stocks, so this can’t be used for buying equity delivery. It can be used for intraday equity trading though.

Hope that helps. :slight_smile:

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Nice explanation, but few new questions raised…

  1. How to determine which stock have pledging benefit or not, before invest in it?
  2. Why some stock have pledge benefit some not? Who decide that SEBI or some other?
  3. Which Stock is better then Pledge enable or non pledge?
4

Check this list of stocks approved for pledging at Zerodha and also go through this post.

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Consider if I have pledged 100 shares of ITC. In future if I unpledge 50 on oneday and rest of the 50 shares after few months. Total transaction charges would be 60+GST or something else?

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It would still be Rs.60+GST.

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Thanks for clarification. :+1:

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Hi,

is there any duration lock to keep pledged or any other charges associated with that?

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If the collateral isn’t used, it will be returned back to you once every 90 days to comply with SEBI’s Quarterly Settlement circular.

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Does Zerodha charge any interest on the margin obtained by pledging?

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@Ashish_Krishna_K No interest is charged on the margin.

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@Smit_K Thank you so much for the reply.

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Really there is no interest charged on this margin received ? Can @nithin confirm this ? I have heard people pledge shares with HDFC Bank and obtain personal loan/overdraft only because of lower interest charges HDFC Bank (around 10-11%). Any thoughts on the same?

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No, there is no interest charged for using securities as collateral. But here is something you need to remember, 50% of the margins of any position you take has to be funded using cash, the remaining 50% can come from collateral margin. If you don’t have the 50% in cash, then whatever cash is short, there is interest on that at 0.05% per day.

Check this

https://support.zerodha.com/category/console/portfolio/articles/what-is-pledging

15

Does exchange allows brokers to fund remaining cash in liue of interest. Moreover can a client regularly trade without bringing any amount of cash if he is ready to pay interest . For eg assume I have 1 crore worth of blue chip stock and assume after haircut I get 85 lakh as margin . Can I use full amount to trade FnO regularly without bringing additional 42 lakhs if ready to pay interest on that amount.

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Thank you for the information @nithin. Yes I have read about the 50% margin before. However, I have a request if Zerodha could show us that information in console/kite or Pi. I only can seen SPAN and EXPOSURE margin blocked when I review my ledger everyday. How can I know how much is cash funded from my account and how much is margin utilised from pledges? Sorry if it’s obvious or already mentioned somewhere. If you could point me or guide me on the same it would be much appreciated.

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Yeah, technically client can trade with broker funding the cash portion of the position. But this is provided that the overall collateral value is > margin required. So for example, you have 2lks of stocks, after haircut u have say 1.4lks collateral margin. You can potentially take position upto 1.4lks without bringing in any cash, but if you did take 1.4lks of position without cash, the broker is putting his 70k cash on your behalf, and hence can charge interest on this 70k.

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18

@Nakul we have explained this on our support articles right?

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Can check that here. Based on stock collateral /liquid collateral and cash one should able to know the exact details.

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You can refer to the “Available cash” field in the funds page on Kite to know if you have taken positions with sufficient cash in your account.
Available cash less than 0 indicates the extent of shortfall in cash for the positions you have taken. There won’t be any interest charges if the available cash is 0 or higher. Check this support article to know more about available cash and other fields on the kite funds page.