Pledged shares are another financial instrument in which an investor borrows money with his shares taken as an advance. It is a way of making a fund without selling the shares. In this approach, the investors do not sell their shares but will enjoy the increases in their values. However, there is a need to understand the concept of what is pledged shares, pledge meaning, pledge meaning in hindi, cdsl pledge link, mtf meaning, share pledge, stock pledge meaning, cdsl pledge charges, cdsl margin pledge, risks, and benefits involved.
Pledged shares are the shares that an investor gives on a temporary basis to a lender, like a bank or broker, instead of getting a loan. This basically refers to a promise, which means the lender is allowed to sell such shares if the borrower fails to pay back the loan.
Pledge meaning in Hindi has a word called प्रतिज्ञा or “pratigya,” which is meant by the term “pledge,” signifying a serious commitment or promise. Financially, “pledge meaning” is the pledging of assets, like shares, so that one may raise a loan by offering them as a guarantee.
Pledging is, therefore, highly used in finance; it enables one to raise money without necessarily relinquishing any right to valuable stocks.
The process of pledging shares has many steps in such a way that both the lender and the borrower are protected legally.
- Agreement: The shareholder and lender agree on how much to lend, the interest rates, as well as conditions around the loan.
- Collateralization: The shareholder promises a number of shares; the lender takes possession of that number of shares as a form of collateral.
- Loan disbursal: The lending party advances the loan typically being a percentage of the market value of the shares pledged for such purpose. This percentage varies with the stability of the stock and its confluence to easy selling.
- Repayment: A borrower has to return the loan amount as per the conditions agreed upon. If he doesn’t follow the conditions mentioned, the lender may sell the pledged shares to recover the amount.
Pledge meaning in Hindi (“प्रतिज्ञा”) in the above context is self-explanatory; a promise with shares as backing for the pledge for the lender.
It has several merits for the shareholders by using the shares as collaterals.
- Alternatively; it gives access to quick capital: It is a process where pledging enables the shareholder to raise quick capital through raising funds with the help of the value of the stocks. It allows acquiring business growth and personal finances not through the sales of the shares.
- Ownership retained: It does not sell shares, thus making it not the same as selling shares. Pledging gives the shareholders the right to remain in ownership of the stocks hence they can feel any dividend and enjoy the voting rights.
- Less Costly Finance: Pledging shares as security is less costly than taking a loan for the same purpose as the shares are provided as collateral.
- Flexibility of Utilisation of Proceeds: The proceeds pledged can be utilised as per the decision of the borrower, which can be in the form of investment to expand his business or to meet other investment requirements.
Though there are merits in pledging shares, there is also some risk involved in pledging:
- Market Volatility: In the event that the value of pledged shares declines severely, the lender may demand additional collateral or collect the debt. This is known as a “margin call.”
- Forced Selling: When the borrower is unable to repay the loan, the lender can sell some of the pledged shares. It might occur when they would have otherwise not sold shares and, consequently, incur losses.
- Market Perception: Issuing the outstanding shares owned by the shareholders of a firm to pledge all or part will lead to an adverse perception of the firm because it will be perceived as giving an indication that the firm is financially unstable.
- All this has to be known before planning to pledge shares because other conditions in the market are most likely to have a significant bearing on the choice.
Types of Pledges
There are different types of pledges, each set to achieve a certain goal in the financial world:
- CDSL Pledge: This means pledging shares with Central Depository Services Limited. The CDSL is one of the crucial depositories in India, holding electronic securities in the demat accounts. It has a link via CDSL pledge through which one can control their pledged shares.
- NSDL Margin Pledge: This is exactly the same as CDSL but is dealt with by National Securities Depository Limited or NSDL. Generally, this pledge type is used for margin trading, where an investor pledges his securities for trading purposes. NSDL margin pledge is a very important aspect in case an investor intends to execute a trade with borrowed funds.
- MTF Pledge (Margin Trading Facility): SEBI rules allow MTF, Margin Trading Facility, the pledge of shares by investors against margin trading. This kind of pledge is also necessary for margin trades made with the aid of any brokerage platform. MTF meaning refers to this as an organised tool wherein shares are used to increase buying power.
These forms of pledges allow various kinds of trading and borrowing opportunities depending on the desired needs of the investors and the trading and borrowing requirements.
Margin trading refers to taking money from a broker to trade. Pledging of shares enables investors to use money without selling stocks, thereby increasing their ability to purchase more stocks in the market. Here is how pledged shares relate to margin trading:
- Increased Buying Power: Investors can purchase more stocks than if they relied only on their own funds by issuing shares to raise the money.
- Deterministic Loan Amount: The value of the pledged shares after a haircut rate is put in place will determine how much the investors can trade in. This is a discount provided by the lenders to compute the amount loaned out based on the risk of the shares.
Two concepts make it possible to provide investors with some additional leverage in the market: margin trading and pledged shares. However, both carry risks of repayment and fluctuations in share prices.
Some of the words here are used in simple terms:
- Share Pledge Meaning: Pledge share meaning is basically an idea of sharing the shares with a loan as a security.
- Stock Pledge Meaning: This is essentially the same as pledge share, providing that it is the process whereby shares are offered to pledge to raise a loan.
- CDSL Pledge Link and NSDL Margin Pledge Link: It is basically a link through which investors can access their accounts and pledge links are managed.
- CDSL Pledge Charges: These are the brokerage fees charged by Central Depository Services Limited (CDSL) when they process the pledged shares. Brokerage fees or other charges may have to be paid by investors for pledging shares.
Pledge Meaning in Hindi का प्रतिज्ञा indeed is significant as it means that it is a serious commitment, where assets are being used as a safety net for the loan provider.
However, a share pledge would come with several charges for any investor who makes such a decision.
- CDSL Pledge Charges: These might be the levies charged to CDSL to process the pledges or not pledge shares.
- Brokerage fees: They charge on some transactions, management of pledged shares, and trading margins.
These need to be balanced as they are causing detraction from the ultimate benefit of pledging shares.
The links given by depositories for the efficient handling of pledged shares are as follows:
- Pledge Link of CDSL: Investors would be able to connect their accounts with the CDSL margin pledge portal for managing and tracking pledged shares. The link would help track their securities.
- NSDL: Margin Pledge Link Just like the digital platform for the management of pledged shares for margin trading, NSDL offers. It will help active traders use pledged shares as funding for their trades.
Via access to such a platform, the tracking and hence management of pledged shares would be even easier, meaning that investors will be well informed about their collateral as well as risks.
Conclusion
Pledged shares pretty much represent a potent financial tool inasmuch as they enable the unlocking of value from held companies without having to sell these items.Understanding pledge meaning and its practical applications can unlock many financial doors and help investors retain ownership of their property while being cautious of the dangers and responsible for managing pledged shares so as not to bring about undesirable financial strain.
For investors looking forward to availing of pledged shares or margin trading, SMC Global Securities offers services for nearly all financial needs. Pledge meaning experts can guide investors through the complexities of share pledging and help make the most of their investments responsibly and strategically.
FAQs on Pledge Meaning
Pledged shares are shares of an investor that he offers as collateral to a lender for taking a loan. The lender has these shares until the borrower pays back the loan. In case the borrower does not repay the loan, the pledger may sell the pledged shares to recover the amount of the loan.
- Availability of Money with Speed: Pledging shares enables investors to seek money speedily without selling shares in the open market.
- Retained Equity: The investor gets to maintain ownership and still receives dividends.
- Cost-beneficial Financing: Shares pledged may enjoy a better cost than loans.
- Leeway: Pledged funds can be sourced by the investor for business or personal use.
- Volatility in the Market: If, for example, the value of the shares pledged collapses, the creditor might demand more pledges or even insist on settlement.
- Forced Sale: The pledge shares will have to be sold by the lender at a loss in case the borrower fails to pay back.
- Negative Sentiment of the Market: A high pledge reflects the sentiments of the market towards the company.
4. What are the Various Types of Pledges?
- CDSL pledge: You pledge shares through Central Depository Services Limited.
- NSDL Margin pledge: You pledge shares for margin trading through National Securities Depository Limited.
- MTF Pledge: Issuance of shares for margin trading under the MTF rules.
- Depository Platforms: Use the CDSL and NSDL platforms to manage and monitor your pledged shares.
- Monitor Your Pledged Shares and Your Securities’ Market Value
- Repay Loans in Time: Repayment on or before the due date to avoid probable risks.
Consultation with the financial advisor would make one understand the intricacies of pledged shares.
Author: All Content is verified by SMC Global Securities.
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