In this article, we will discuss
- Exploring Margin Trading Funds for Growth
- Meaning of Margin Trading Funding
- Components of a Margin Trading Fund
- Benefits of Margin Trading Fund
- Risks of Margin Trading
- Frequently Asked Questions
Beyond Traditional Investing: Exploring Margin Trading Funds for GrowthIf your own capital allows you to buy shares worth ₹25000, by using margin trading funds, you can possibly buy shares of up to ₹50,000 or more. If you are wondering how, then here is your answer. Any fund above your own capital that you use to buy more stocks is what you borrow from your broker. It is an interesting feature of the stock market and comes with its own share of risks and rewards. Read this blog to gain a better understanding of the features of this facility and how you can leverage it to achieve your financial goals.
Meaning of Margin Trading FundingJust like a loan from a bank, a margin trading fund is a loan a trader takes from its brokerage firm to execute trades of higher value. Since it is a loan, you must also pay interest on it for the period the loan remains outstanding. Different brokerage firms have their own interest charges that they levy to lend margin money. Therefore, whenever you are taking money from your broker to execute a trade, it is margin trading.
Components of a Margin Trading FundThere are several components of a margin trading fund, which have been discussed below:
Benefits of Margin Trading FundThere are several advantages of margin trading funds. Let’s take a quick look at it.
- Since a margin fund is borrowed money, it has an advantage of allowing traders to leverage more than their capital limit. Hence, you can buy more shares with limited funds.
- It allows you the possibility of making higher gains than what you could have earned with just your own capital.
- It is more flexible than your regular loan borrowing process. You don’t need to go through the entire approval process like regular loans.
- It reduces your dependency on seeking funds from other sources, and you can borrow directly from the broker.
Risks of Margin TradingWhile a margin trading fund may sound like an attractive avenue for executing trades, it has its own share of risks and drawbacks.
- Just like it gives you a chance to amplify your gains, you can also end up amplifying your losses with margin trading.
- It isn’t a beginner-friendly facility, and you must take a lot of caution while using it.
- If you fail to meet the minimum margin even after the margin calls, the broker can square off your trade irrespective of what your viewpoint on the trade is. This way, you can end up losing your entire capital as well.
- Interest on the borrowed funds is an additional cost that you must bear for as long as you have outstanding borrowed funds.
- Since you need to maintain a minimum balance, a portion of your fund is always locked.