Before opening a margin funding account, you need to know about its important aspects which include buying power.
As an investor, it is important that you maintain a diverse portfolio. Having numerous investment vehicles in your portfolio not only assure great returns, but also help in becoming credible for a variety of services that are offered to an investor; one such service being Margin financing.
What is Margin financing?
Margin financing is defined as the process whereby individual investors buy more stocks than they can afford to. In simple words, Margin financing is a loan offered by brokerage firms which allows the investors to buy stocks more than their purchasing power. Earlier, margin financing offered loan for one single session, where the investor had to buy or sell the securities in a single day. Now, the loan duration has been increased by the brokerage firms and the investors can pay the loan at their convenience.
The application process for margin financing is very simple, you can either call the brokerage firm for the provision or you can apply for it via the firm’s website. The provision will be added to your account quickly and you can use it buy bonds or equity.
There are a few things that you need to keep in mind before you apply for margin financing. It has some restrictions like buying power which should be considered while investing.
A margin buying power is the amount of capital that an investor can avail to buy shares or securities in a margin account. It is the sum of cash in the brokerage account and the margin available to the investor.
How to calculate margin buying power?
The concept of margin buying power is a little complex and can be understood better with the help of an example. Suppose, you have INR 1,00,000 worth of ABC stock which you have purchased using INR 70,000 in cash and INR 30,000 on margin. Now, if you would like to purchase stocks or bonds of a different company, and you need 50 percent of the purchase amount from your margin account, you need to know your margin buying power.
Even though you need 50 percent as the initial margin requirement of ABC stock which is 50%, the maintenance margin requirement of ABC is 30%. Here is the formula you need to apply.
INR 1,00,000 * (100%-30%) = INR 70,000 → the maximum amount you are eligible to borrow.
INR 70,000 – INR 30,000 = INR 40,00
Since, you have used INR 30,000 of the available margin, your current available margin becomes INR 40,000, which is also your cash buying power.
INR 40,000 / 50% = INR 80,000
Your margin buying power for purchasing XYZ stock is INR 80,000.
The concept of margin buying power can be complex and confusing to some. Hence, it is recommended that you take the help of your investment advisor to understand it better.
To understand equity and other investment better or to know more about margin funding, you can visit: plindia.com