A crack at Margin Funding
The unpredictability of the stock market creates situations that make it difficult for investors to procure last minute funds to invest in the market. The concept of margin funding is the perfect means to ensure that investors continue purchasing and trading despite any shortfalls in funds. We will be discussing how the concept works for you.
What is margin funding?
Margin funding is a short-term loan facility that investors can use to make up for any short-comings that they encounter, while trading in futures and options or when purchasing stocks, at a pre-determined rate of interest. This predetermined interest is paid to the brokerage for short-term loan transactions on future trades. There are two ways for an investor with a demat account to avail this facility – they can connect with their investment advisor from the brokerage firm or they can go online and apply for it from their agency’s website.
How does margin funding work?
Most brokerages require the investor to provide 50% margin to receive coverage from them. For instance, if the shares of company X are priced at 1 lakh on the market, and you’d like to purchase them, then you will have to present 50,000 to the brokerage for them to cover the other half of the investment.
You can also use shares available in your demat account as collateral instead of hard cash to avail funding, but only if the shares are a part of the brokerage’s list.
Interest rates applicable?
Brokerages usually charge between 15-18% based on their relationship with the client and the investment quality of the stocks in question. Large capital investors and clients with good rep with their brokers usually get cheaper rates. However, as a mitigation measure against market risk during turbulent times, brokerages are known to increase interest rates regardless as well.
What if Share value falls?
In the event where the value of shares fall and were purchased using margin funding, the maintenance margin kicks in. It is simply the minimum amount that clients must maintain with the brokerage against such events. The amount for margin maintenance is derived from the percentage of the securities’ market value from the closing price of the previous trading day. The brokerage may liquidate positions if the margin falls below the limit and their margin call is not met.
What do brokerages get out of it?
Brokerages benefit from interest income and boost in volumes, making margin funding a profitable business. Brokerage firms on the domestic tier offering this facility are key market players like Prabhudas Lilladher.