What is Margin Funding in Trading: Key Concepts and Elements
Imagine you want to buy a smartphone that costs ₹ 25,000. You’ve only got ₹ 20,000 with you. Your friend funds the shortfall of ₹ 5000, allowing you to purchase the phone. In the world of trading, margin funding works on similar lines. Here, your broker gives you the funds to buy the securities you want.
What is margin funding?
Margin funding refers to borrowing funds from your broker when you don’t have the desired funds. Let’s understand it with an example. Suppose you have ₹ 10,000 in your account. You want to buy 20 shares of a company trading at ₹ 1000 per share.
As you have only ₹ 10,000 in your account, you can buy only 10 shares. In margin funding, you can ask your broker to fund the shortfall (₹ 10,000 in this case) and buy 20 shares. Learn more about the benefits of margin trading facility.
Important components of margin funding
Before availing margin funding from your broker, you need to understand certain important components. Let’s understand them below:
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Initial margin
The initial margin is the minimum amount you need to deposit to your broker before you can place a trade with margin. It’s a percentage of the total value of the purchased securities. This initial margin can be both in the form of cash deposits made by you or shares pledged by you for margin. It varies across brokers.
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Margin call
When the value of your initial margin goes below the required amount set by your broker, a margin call is triggered. You need to deposit the required funds to maintain the minimum margin requirement and your MTF position. If you don't, your broker can liquidate all or some securities to cover the shortfall.
Suppose your trading account has ₹ 10,000, and you borrow an additional ₹ 10,000 from your broker. If your broker sets an initial margin requirement of 20% against a security or scrip, you must maintain at least ₹ 4000 in your account (20% of ₹ 20,000). If the value of your available fund balance goes below Rs 4000, a margin call gets triggered.
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Interest rate
As margin funding is a type of loan, you need to pay interest on it. The interest rate depends on the amount borrowed and the broker’s terms and conditions. Before availing funds through margin funding, you must know the interest rate and calculate the interest you’ll pay.
Margin funding eligibility
While specifics may differ across brokers, to be eligible for margin funding, you need to:
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Open a margin account with your broker, which allows you to borrow funds. In several cases, the existing trading account acts as your margin account.
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Enter into a margin agreement with your broker that outlines the terms and conditions of margin funding, including your interest rate.
Check out your eligibility with your broker before opting for margin funding.
In conclusion
While margin funding can help you manage a shortfall in funds for trading, using it with prudence is vital. It’s wise to avail yourself of an amount you can easily repay. Ensure you understand the terms and conditions well before opting for it.
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This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.
