Digitization has made trading much easier and less tedious than before. Gone are the days when you had to share physical certificates for trading in shares. Digitization led to the creation of Dematerialization Account or as it is simply known as Demat account.
What is a Demat Account?
You might ask what is a demat account? Just like a savings bank account holds all your savings, a demat account holds all your investments in the electronic format. The process of converting these physical certificates into their electronic format is called dematerialization. This eliminates the process of sharing physical certificates for buying or selling stocks.
You need to choose a broker when you start trading. It is of prime importance that you choose the right brokerage firm which helps you with everything from investing right to giving market updates, reports and much more.
Some firms and brokers also provide the facility of collateral against your shares in the demat account.
What is a Collateral in Demat Account?
A Collateral is an amount which a broker can offer an investor against the shares held in the demat account. An investor can consider this as a value-added service provided by the broker.
In India, not all brokerage firms provide this service as there is some risk associated with it. Simply put, brokers allot shares in your demat account so as to increase the trading limit for you.
What is Collateral Margin and How Does It Work?
Collateral in the Demat account has benefits for the broker as well as the investor. If there are any idle shares in an investor’s demat account, and if the investor is short on liquidity while trading then the idle shares can come in handy to keep as collateral. This is the margin funding which an investor requires to trade and hence it is called Collateral margin. This saves the investor from spending more cash. Brokers charge an agreed upon rate of interest for this service.
If the investor wants to release the collateral, then he/she can do so by releasing the payment to the broker. If there is an event of failure to do the payment, then the broker can recover the capital by selling the said shares.
Where is the Collateral Benefit Provided?
The collateral benefit is provided to the investor for the shares held in the demat account. To avail the benefit, the demat account holder needs to maintain a percentage of cash margin.
What happens when an investor is not able to release or withdraw the collateral in the demat account?
An investor can release the hold on their collateral on the trading day if they have not taken any position which is for or against the share. In such a scenario the shares get released in the demat account on the same day.
If the investor wants to withdraw the shares for T+1 day or beyond then they can do it fully or partially, based on how much margin is available. The shares are then released in the demat account by the day’s end.
If you are in need for more margin or want to increase your trading limit then you can make use of the collateral in Demat account service.