What is Share Pledging?

 This blog is to understand what is pledging of shares and the effect of pledging of shares by the Promoters on the stock market performance of the company.

What is pledging of shares?

To explain it in simple words, pledging is a common practice that the shareholders perform (i.e borrowing loans against the shares they hold ) to meet various financial requirements.

Pledging of shares by Promoters:

Promoters pledge their shares to raise funds, which means that promoters use their stake as a security to take loans.

The Promoters can raise funds by other ways like equity funding and debts. These are safer than the pledging of shares. 

Then why do promoters go for the option of pledging of shares?

Promoters pledge their shares generally when all other options of raising funds are closed and pledging is the only option left.

How does pledging of shares impact stock market performance?

An investor before investing in a particular stock investigates various aspects and pledging of shares is one of those and which is more often overlooked by investor.

The pledging of shares by promoters may have a significant impact on investors as the high pledging of promoter's shares project that the company is in some kind of crisis and the investor might step back to buy such company's stock.

The promoters utilize their ownership as collateral when pledging shares to obtain secured loans. In a bull market, where prices are rising and investors are confident, pledging shares may not present many problems. The issue, though, appears during a bear market or a slowdown in the economy.

The value of the collateral (against the secured loan) similarly fluctuates along with the share price as the price of stocks does. However, the promoters are often expected to maintain the collateral's value. Now, the value of the collateral will decrease if the share price drops. The promoters must make up the gap by the difference between the collateral value and paying the lender more money or adding more shares to your pledge. 

                                                                                                                              BY

                                                                                                               ADARSH MAHENDERKAR

Comments

Post a Comment

Popular posts from this blog

The Unknown History of Bhavsar Kshatriya

Image
This blog is to share the knowledge that I know with you about one of the ancient Kshatriya clan of India-the Bhavsar Kshatriya. Who are Bhavsar Kshatriya: It is a unknown fact that Bhavsar Kshatriya is the Asia's ancient warrior clan whose descendants are present even today across India. Legend has it that the Bhavasar first appeared in Saurashtra.  According to the epic tales, the legendary Parshuram, who was thought to be an avatar of Vishnu, swore revenge on the kshatriyas (the warrior class) and wiped them off almost entirely. Two young princes from Saurashtra named Bhavsingh and Sarsingh were concerned about this scenario since they had predicted the demise of their dynasty. The princes had been instructed to make an appeal to the Hindu goddess Hinglaj at the sacred shrine located on the banks of the Hingol River in Makran, Baluchistan in modern-day Pakistan. The Hindu goddess assured protection of their dynasty by compelling Parshuram to leave them alone, provided that no...
Read more

SIP Vs MUTUAL FUNDS

Image
Know the difference between SIP and Mutual Funds: Before knowing the difference between the SIP and mutual fund. We learn What is SIP? A Systematic Investment Plan (SIP), also known as SIP, is a facility provided by mutual funds to investors to invest in a disciplined manner. SIP allows an investor to invest a set amount of money in a mutual fund scheme at pre-determined intervals. The fixed amount of money can be as low as Rs. 500, and the pre-defined SIP intervals can be weekly/monthly/quarterly/semi-annually, or annually. By investing via SIP, the investor invests in a time-bound manner without worrying about market dynamics and stands to benefit in the long run due to average costing and the power of compounding. What is Mutual Fund? A mutual fund is a collection of money from investors with the goal of investing to achieve a common goal. To earn returns while achieving the stated goal, investments can be made in a variety of assets such as equity, bonds, and money market instrumen...
Read more

Digital Lending in India: Opportunities and Threats

Image
By M. Sandeep, August 13, 2022 What is Digital Lending? There is a steady rise in digital lending in India with several start-ups and NBFCs. It   permits borrowers to apply for loan from any internet-working device at any location. Customer can apply for any business loan products such as credit cards, business loans, mortgage. The entire process is conducted digitally where customer has no need to send all papers he just have to enter OTP’s. It's Opportunities: Banks and NBFCs are refusing to provide the loans for the salaried individuals in Tiers 2,3, and 4 cities   due to lack of credit history or for not being prime customers. Digital lending is expected to grow rapidly with loans to small and micro enterprises. Smartphones has a huge role in the adoption of digital avenues. People in the remotest areas are capable of making transactions easier through smartphones with the internet, which reduces the transaction cost. Innovative products offered by the start-up...
Read more