What is Margin Funding and How does it work exactly?
Stock markets are volatile and often create dangling situations for investors. Investors need funds to make investment and mount up their gains, but funding hindrances often make it difficult. That’s where margin funding comes to help the investors. It simply gives investors more options for funding when they have not any. What is Margin Funding? How does Margin Funding work? What are typical interest rates charged by brokers in margin funding?
What is Margin Funding?
It is basically a concept that allows investors to keep trading irrespective of the shortfall in funds. Margin funding gives a short-term loan facility that can simply ease up the fund shortcomings. Investors who are trading in futures, options, or stocks can be benefited from this form of funding. Below video can help to under margin funding better.
Courtesy: Angel Broking
This loan facility is provided on a pre-determined interest rate, which is paid to the brokerage. The investors must have a Demat account to avail the loan; they can either connect to the brokerage firm or go online and apply on the agency’s site.
How does margin funding work?
A majority of the brokerage needs a 50% margin to trade from the investor. Let’s take an example: if company X has its share priced at INR 1,50,000 and you wish to purchase them, you would need to present INR 75,000 as brokerage to cover the investment. You can also use the shares from your Demat account as collateral rather than paying in cash.
What Are The Interest Rates of Brokerage?
Depending upon the relationship with clients and their investment quality, the brokerage interest rates can vary between 15-18%. Investors with large capitals who share a good relationship with their brokers are likely to bag cheaper interest rates. However, to mitigate the risk of market volatility during crisis times, brokerages might increase their interest rates. So, it depends on both the market situation and the clients’ relation.
What happens when the share value falls abruptly?
It is one of the major concern areas for investors who have invested in shares with margin funding. In case, the share prices fall that you have purchased with margin funding, then the maintenance will be activated. It is a minimum amount that you, as an investor, need to keep with the brokerage for such unpredictable events. Generally, the maintenance margin amount is calculated from the percent of the market value of securities from the previous trading day’s closing value. The brokerage is allowed to liquidate the position if the margin goes below the limit, and the margin call is not attended.
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What is a Margin Call?
It is an alert given to the investors when their margin account goes low on funds because of losses. It requires additional capital to maintain the minimum balance in the margin account and further proceed with the trading.
Margin funding is certainly a blessing is a disguise for investors who are keen to diversify their investment potentials. Once you have understood the benefits and working of this funding, you can make the most of it in your trading.
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Team – Myinvestmentideas
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