Collateral margin is trading margin you free up by pledging the shares, ETFs or mutual funds you already own, instead of bringing in fresh cash. The holdings stay yours. They are marked as pledged in your demat account and act as the security deposit behind your trades.
How can shares act as margin?
Margin is simply a deposit that guarantees your trades can be settled. Cash is the most obvious deposit, but good-quality securities work too, the way a bank accepts property, not just cash, as security for a loan.
Take Meera. She holds ₹5,00,000 of Bharat Paints Ltd shares bought years ago for the long term, but her trading balance is nearly zero. Rather than sell the shares or transfer fresh funds, she pledges them. Her long-term investment stays intact. She continues to receive dividends, bonuses and other corporate benefits, while a large part of its value becomes usable margin for her trading.
The steps on Rupeezy are covered in How to pledge shares to get margin (collateral margin)?
What is a haircut, and why don't I get the full value?
Share prices move. If Meera's ₹5,00,000 of shares were counted as ₹5,00,000 of margin and the stock fell 15% the next day, the deposit would suddenly be too small. So a safety discount (the haircut) is applied first:
| Item | Amount |
|---|---|
| Value of pledged shares | ₹5,00,000 |
| Haircut (illustrative 20%) | −₹1,00,000 |
| Collateral margin received | ₹4,00,000 |
The haircut percentage depends on how risky and how liquid the security is. A steady index ETF or a liquid fund attracts a small haircut; a volatile small-cap stock attracts a large one, and many securities aren't accepted as collateral at all. The approved list and applicable haircuts are covered in Which stocks and mutual funds can I pledge for collateral margin?
Your collateral margin is valued on the previous trading day's closing price of the pledged securities, not the live market price. It is recalculated once a day, so a price move today doesn't change your margin during the session — it shows up in the next day's collateral value. Because the haircut is applied to that daily closing price, your collateral margin still changes from day to day with the value of what you pledged.
Can I trade entirely on collateral, with no cash?
Generally, no, and this catches many traders. Under the exchange framework, margin for derivative positions must come partly from cash (or cash-equivalent collateral) and partly, at most, from securities collateral. Cash-equivalents (such as pledged liquid funds and certain other instruments) count on the cash side; pledged stocks count on the securities side.
If your cash component falls short, the securities collateral cannot substitute for it beyond the permitted proportion, and the gap is treated like any other margin gap, including possible interest or penalty consequences. The exact proportion and the list of cash-equivalents are set by the exchanges and can change, so check the pledge article above for current specifics.
What happens to my pledged shares?
They remain in your demat account with a pledge marked in favour of the broker's margin-pledge account, under the depository's margin pledge system.
You don't have to unpledge them before selling. On Rupeezy, placing a regular Delivery sell order on a pledged holding unpledges the quantity you're selling and sells it in one step. There's no separate unpledge request to submit first, and the same applies to squaring off an MTF position. Your collateral margin then drops by the value of what you sold. The details are in can I sell pledged securities instantly without placing an unpledge request.
If your account runs into an unresolved shortfall or debit, pledged securities can be invoked (sold) to recover dues, as per the agreed terms.
Things to keep in mind
- Collateral margin moves with the market, one day at a time. It's based on the previous day's closing price, so a fall in your pledged holdings today shrinks your margin from the next day — even if your positions are fine.
- Keep the cash component requirement in mind before building derivative positions purely on pledged stock.
- Pledged shares stay sellable, a Delivery sell order handles the unpledge for you, so pledging doesn't lock you out of your own holdings.
- Pledging costs a small per-request charge and, more importantly, puts your long-term holdings behind your trading risk, pledge deliberately, not by default.
Read next
What is the margin benefit on hedged positions? — And how a hedged position wins back much of the margin it would otherwise cost.