Collateral Amount: Meaning, Importance And Benefits

Investing and trading in the share market requires a demat account. Your demat account is immediately updated each time you make a purchase. Similarly, if you open a demat account and link it to your trading account, whatever you buy from the market is automatically stored in the demat account. In addition, if you have a demat account, it can help you buy assets even if you are a bit short of funds. This is where the collateral amount comes in. However, you might be wondering at this point what collateral margin is. So, let’s explore it today.

What is Collateral?

With regards to a demat account, collateral is nothing the value of items, which in this case is mostly shares, which lets you take a loan to trade more securities. To put it more plainly, you get this amount in exchange for the shares in your demat account. You can trade over your capital limit thanks to this sum. Remember, to use this facility you must have an active margin account with the brokerage firm. This implies that the collateral amounts offered by the stock brokers shall vary with each one of them.

How Trading With Collateral Works?

An investor might use this service provided by stockbrokers if they wish to trade shares but are short on cash. Your stockbroker will provide you a loan by raising your trading limit rather than giving you cash when you use the idle stocks as collateral. A specific percentage of interest will also be charged by your broker for delivering this service. A demat account user can trade securities without spending additional money on doing so. 

Your idle stocks will be temporarily barred if you use them as collateral. The assets held in demat account cannot be sold again until the margin and interest are paid. The securities held as collateral will be delivered to the demat account holder after completing the necessary payments. After that, you can carry out any operations to transfer or sell the shares. However, the stock broker may sell the shares used as collateral and redeem the cash if you fail to return the collateral. Therefore, to obtain your securities, ensure that you pay your broker all of your margins. 

How Collateral Amount Is Calculated?

On the basis of the value of assets you are using as collateral, the amount of collateral is calculated. Your stockbroker will not provide you the whole amount as collateral since there is a chance that the market price of the collateral assets may decrease. Because of this, the real collateral amount given to you to increase your trading limit is less than the total amount of the securities pledged.

Benefits of the Collateral Amount 

Using the collateral margin facility has various advantages, some of which are outlined below:

1. It improves your capacity to buy and sell securities: Collateral margin may be quite helpful, especially if you are experiencing a liquidity crisis. You can buy and sell shares using this service without having to deposit more money in the trading account. Instead, depending on the worth of the shares you pledged, your stockbroker merely raises your trading limit.
2. It raises your leverage: Because the availability of the collateral sum allows you to buy and trade assets on borrowed funds, your leverage grows, as does your capacity to generate a better return without making a larger initial investment.
3. It makes it possible for you to use the securities you already possess to acquire and sell more securities: The securities you have bought for the long term frequently remain inactive in the demat account rather than producing a return in the meantime. But you can make use of such securities and make more transactions with the assistance of the collateral margin facility.

Conclusion

The collateral amount for an online demat account is simply a loan provided by a stockbroker secured by the shares held in your demat account. By increasing the amount of money in your trading account, the collateral amount, also known as the collateral margin, can help you raise your trading limit. The broker typically charges a fixed percentage of interest for offering this service.

However, there are several good brokerage houses today that offer low-cost trading facilities. With such firms you can avail all types of services in a demat & trading app at pretty reasonable costs. blinkX is a prime example, where you can avail a sizable collateral amount at minimal charges. So, you can encash on good trading opportunities whenever you like.