Investors looking to raise money by pledging their shares should know that banks give loans of up to 50 per cent of their value. Since stock prices fluctuate, the amount of loan you are eligible for will also fluctuate.
Those between 21 and 75 years of age are eligible for this loan.
When markets fall and the value of the pledged shares declines, borrowers are required to put up additional margin money in order to maintain the loan-to-value ratio.
In case of some lenders, if you delay repayment, the penalty charged can be as high as 2 per cent per month or 24 per cent per annum.
Most loans against securities are given as overdraft facility. There is a risk that when the markets are falling, the limit up to which you can withdraw can be reduced.
Mid- and small-cap stocks tend to be more volatile, so the percentage of loan approved could be less if you pledge them.