Pledge Of Shares Meaning

Pledge of shares meaning is a concept a trader must be very clear about before investing their capital in any company. The percentage of the pledge of shares of the company has severe impacts on retail investors.

You must be aware of the happenings in the company to ensure your capital isn’t lost. This level of transparency is enabled by the various exchanges like NSE, BSE of the Indian Stock Market.

know the difference between BSE and NSE and invest accordingly.

The percentage pledged shares of the listed companies are tabulated and made available on the exchanges’ official website.

Also, read Most Expensive Stock In India

The impacts of this are a completely different discussion. Let’s dive deeper into the meaning of the pledge of shares.

What Is Pledge Of Shares?

According to the Oxford dictionary, the word pledge means “to formally promise to give or do something.”

So, when a promoter or investor pledges his/her shares, they wish to get a loan against a part of their shareholding.

This loan can be for a personal reason or for meeting the daily expenses of the company or to be used as capital investment. Irrespective of the reason, the shares can be pledged by the shareholders.

The option to pledge shares is available for the companies listed on an official exchange. An unlisted company is generally not permitted for the same.

Although, it might vary on a case to case basis, decided by the lender.

The percentage of pledged shares has a direct impact on the retail investors and the shareholders as well.

A higher percentage means a higher risk to the capital invested and a larger risk of a sudden downfall of the shares’ prices.

Although the shares are pledged to the lender, the shareholder retains the rightful owner of the shares, which means that he is eligible for all corporate benefits like dividends.

But the shareholder can’t pledge the same shares again or sell them.

As the lender owns the shares and if the shareholder defaults on loan, the lender is entitled to either sell off the shares or ask for more deposits as deemed necessary by him.

In this scenario, the lender doesn’t care about the share prices and moves ahead with the selling procedure.

Generally, selling off the shares are used as the last resort and a result of a knee jerk reaction. This reaction is never beneficial for the retail investors as the prices of the company’s shares come crashing down.

This phenomenon leads to huge losses for individual traders. The pledged shares are invoked by the lender after the loan has been successfully paid back. 

Those opting for this facility needs to know that many brokers don’t even charge any fee for it. For instance, Groww pledge charges are zero.

But traders need to pay certain unpledging charges and fees for reduction in the account balance below the opening mark.

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Conclusion

A Pledge of shares is a way to raise capital. It is used by the promoters or investors against a percentage of shares held by them. This money could be raised for multiple reasons.

Every shareholder can pledge his/her holdings for a personal or professional reason. The process of a pledge of shares can be risky for the company and the retail investors but is riskier for the latter.

In the worst-case scenarios, the operations of the company might cease, and the prices of the shares might crash, leading to huge losses for the individual investors.

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