What is 'Haircut' in Pledge?

 A haircut is the percentage reduction applied to a security’s value when calculating collateral margin. It acts as a standard risk buffer used across the industry to account for normal price fluctuations, ensuring the pledged value remains adequate even during volatile market moves.

This approach allows brokers to provide margin against securities while managing sudden price changes, and it does not affect the market value or ownership of your holdings.

Example of Haircut in Pledge:

For example, if you pledge a stock worth ₹1,000 with a 20% haircut:

• ₹200 is reserved as the haircut (safety margin)

• You receive ₹800 as your pledge/collateral margin

Your stock still remains worth ₹1,000 and you can sell it at market price anytime. The haircut only affects how much margin you receive, not the stock's actual value.

Note: Haircut percentages vary by stock and are decided by the risk policy of the broker based on the stock's volatility and liquidity. Higher-risk stocks have higher haircuts.