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Pledged Shares Are A Hidden Fuse
The rule
When promoters have pledged their shares to lenders, those shares get dumped in a fall, turning a normal dip into a crash.
Where it flips
Used as a blanket rule, this rejects sound companies where a small, well-covered pledge is routine and harmless. The fix: read the pledge in context. A low, steady pledge with strong cash flows is minor. A high or rising pledge in a weak business is the real danger.
When promoters borrow money by keeping their own shares as security, a falling price can force lenders to sell those shares to get their loan back. That forced selling pushes the price down more, which triggers still more selling. So a normal dip snowballs into a crash. A high pledge level is a hidden fuse sitting under the stock. Before trusting any company, check how much of the promoter's holding is pledged. It is shown in the shareholding pattern.
A worked example
Haridya buys a mid-cap where the promoter has pledged 70% of his stake. When the price slips 20%, lenders sell the pledged shares, and the stock falls another 45% in days, as the forced selling feeds on itself. [illustrative]
How to spot it
- ·High share of promoter holding pledged
- ·Pledge rising quarter after quarter
- ·Weak cash flows behind the borrowing
Santosh Nair · Bulls, Bears and Other Beasts