Pledging Shares vs Pay Later (MTF): Key Differences

Nowadays, many retail investors resort to margin trading so that they can buy more shares even with less capital. But there are two main ways to get this facility one is availing margin by Pledging Shares, and the other is Pay Later (MTF), where the brokerage firm lends you money. Both options work differently and choosing the wrong option can also lead to losses. 

In this blog, we will understand in simple language what is the difference between Pledge Shares vs Pay Later, which option can be better for you, and what things should be kept in mind.

What is a Margin Trading Facility (MTF)?

Margin Trading Facility (MTF) is a facility that gives investors the advantage to buy more shares with less capital. In this system, instead of paying the entire amount at once, you invest a certain percentage of the amount yourself and your broker lends the rest of the amount. In return, the broker charges interest from you.

Example : Suppose you want to buy shares worth ₹1 lakh but you have only ₹25,000. If your broker gives 75% margin, then you can buy shares worth ₹1 lakh even by paying ₹25,000. The broker will give the remaining ₹75,000 and you will have to pay interest on it daily.

Pros of Margin Trading Facility

• Facility to do big trades with less capital : Through MTF, you can buy shares of large amounts even by investing less money. This gives you the opportunity to catch big opportunities in the market, especially when you do not have the full amount.
• Margin facility without needing an existing portfolio: With MTF, you can avail funds from the broker even if you don’t already hold shares. This allows you to trade and capture opportunities in the market without depending on your existing investments.
• Regulated and secure system by SEBI : MTF runs completely as per the rules of SEBI. Under this, the process of pledging is done through NSDL/CDSL, which maintains transparency and security.

Cons of MTF

• Interest cost can be high : In MTF, interest is calculated daily on the amount taken from the broker. With most brokers, this interest can be as high as 12% to 18% per annum, which significantly increases your cost in the long run.
• Big loss due to high leverage : If the trade goes against you, then due to leverage the loss can also be equally high. Therefore, using MTF without risk management can be dangerous.
• Forced selling of shares when the market falls : If the value of the pledged shares falls and the margin in your account reduces, then the broker can force selling. This puts the decision to exit the trade out of your control.

What is Pledging of Shares? 

Pledging of Shares is a facility in which you can get margin for trading from the broker by pledging your existing shares. This saves you from having to invest extra money and you can make new trades using your existing portfolio. This is especially beneficial for those investors who want to hold long term investments but also want to trade in the short term.

How does Pledging of Shares work?

When shares are pledged, the broker applies a haircut to their value. This means that the collateral value of your pledged shares is reduced by a certain percentage. The haircut varies depending on the market value, volatility, and overall risk profile of the share. Higher-risk or more volatile shares usually attract a higher haircut, which reduces the effective margin you receive.

Example : If you pledge shares worth ₹1,00,000 and the haircut is 25%, then you will get a margin of ₹75,000. You can use this margin in share trading, option selling or other segments.

Pledging of Shares Process: OTP facility from CDSL/NSDL

Pledging of Shares is completely digital and SEBI-regulated. You have to give OTP-based approval through CDSL or NSDL. For every pledge, you get a link via SMS/E-mail, through which you approve the pledge.

Which stocks can be pledged?

Not every stock is eligible for pledge. Pledge is allowed only on stocks approved by SEBI and included in the broker’s approved securities list, usually bluechip and high-liquidity stocks.

Pros of Pledging of Shares

• No need to invest extra cash : You can trade by pledging the shares you already have; this eliminates the need to invest new capital.
• Trading without selling long-term holdings : If you want to hold your stocks for the long term, you can still pledge them and trade in the short term. This gives both benefits.
• SEBI regulated, secure process : The pledge system through NSDL/CDSL is transparent and secure. The broker cannot take any action without your permission.
• Useful in option trading : Margin is required for option writing (selling) in this situation pledged stocks prove to be very useful as it reduces the capital requirement.

Cons of Pledging of Shares

• Due to haircut, full margin is not available : Haircut is applicable on every share. On some stocks, a haircut can be 30% or more, due to which you get less margin.
• Some stocks are not eligible for pledge : Not all shares can be pledged. If you have shares of small or illiquid companies, then you may not be able to take pledge margin from them.
• Risk of Auto-Square Off in market fall : If the value of your pledged stocks suddenly falls and the loss in your position increases, then the broker can automatically square off your position (auto square-off). This can lead to losses.

Read Also: Differences Between MTF and Loan Against Shares

Pledging of Shares vs Pay Later (MTF): Key Differences

Feature	Pledging of Shares	Pay Later (MTF)
Source of Funding	Margin from own holdings	Funds are received in the form of loan from the broker
Ownership of shares	Shares remain in your name	Shares are purchased in your name using borrowed funds
Interest Rate	Interest on margin is charged only if used overnight or for delivery trades	Daily interest applies (typically 12-18% annually)
Risk Level	Low to medium	Higher, especially in volatile markets
Ideal Use Case	Option trading, margin shortfall, hedging	Positional trading for higher returns
Margin Flexibility	Depends on haircut % and type of pledged stock	Depends on broker limits and transaction size
Regulation	SEBI-mandated CDSL/NSDL pledge system	Governed by SEBI’s MTF framework

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When Should You Use Pledging of Shares?

• Already held shares should be available : Investors who already have quality stocks and do not want to sell them can generate additional returns by trading using pledged shares.
• Trading with Limited Capital : When there is an opportunity to trade in the market but cash is limited, Pledging of Shares is a better solution as it does not require investing new funds.
• There should be a plan for option selling or hedge strategy : Pledging of Shares is most beneficial for option sellers, especially in hedged strategies (such as covered call or spread trades) where margin requirements are high.
• Financing costs are low : The interest in Pledging of Shares is very low or sometimes even zero on intraday trading as compared to Pay Later MTF, making it a cost-efficient way of capital utilization.

When Should You Use Pay Later (MTF)?

• When trading capital is low but conviction is high : If you have confidence in a stock or move but do not have required funds, then with MTF you can create a trading position without missing that opportunity.
• Suitable for short-term or swing trading: The Pay Later facility is designed for traders looking to capture price movements typically within 3 to 15 days. By providing leverage, MTF enhances the potential for higher returns over this short holding period.
• Immediate entry is needed in a high momentum market : When the market is moving fast and delaying entry can be harmful, then MTF offers an instant funding option.
• Capital efficiency needs to be improved : With the Pay Later feature, you can take a much larger trading position with less capital, which can help in using the available funds in a smarter way.
• Interest cost seems manageable : If you are planning to square off the trade quickly and the impact of interest is minimal, then MTF can prove to be cost-effective.

Conclusion

Pledging Shares and Pay Later (MTF) are powerful tools that offer flexibility and capital efficiency to modern traders. However, choosing the right option depends on how you trade and whether you have some shares that you wish to hold for the long term or not. Pay Later (MTF) works best for short term trading opportunities, while Pledging Shares can be a smarter way to unlock the value of your long term holdings. Your decision should align with your trading style, risk appetite and investment horizon. Always keep in mind that leverage is a double edged sword. It can amplify gains but without the right strategy it can also magnify losses. Hence, it is advised to consult a financial advisor before using either of these features.

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