A Complete Guide on What Is Margin Funding

In this article, we will discuss

• What is Margin Funding?
• How Does Margin Funding Work?
• Essential Points to Remember Regarding Margin Funding
• Advantages of Margin Funding Facilities
• Enjoy 33X Intraday Leverage With Samco
• Conclusion

Almost every trader in the stock market knows that margin trading helps enhance their buying power. However, not all of them have a clear idea of how the entire process works. Thus, to ensure that they can make justified use of this facility, individuals need to know the meaning of margin against funding and how it works. Keep reading to learn more!

What is Margin Funding?

Margin against funding is an integral part of margin trading. It allows you to purchase securities at a fraction of the price while your broker pays for the remaining transaction value. Thus, the amount of money that the broker pays on your behalf is called margin funding. It is essentially a short-term loan provided by brokerage firms at a prefixed rate of interest. It allows traders to purchase stocks or make up for shortfalls while trading futures and options when they do not have enough funds for trading. Individuals can pay back the broker at a later date after squaring off their positions.

How Does Margin Funding Work?

To avail of margin against funding, traders have to accept all the terms and conditions which are applicable under the margin trading facility. It is provided in the user’s existing trading account, and they have to pay a margin amount, which can either be in cash or via equity collateral. In order to activate this facility, traders simply need to apply for it via their brokerage app or through the firm’s website. It allows them to create a leveraged position in securities as their purchasing power increases to a multiple of the cash which they have on hand. Moreover, individuals can hold their positions for a time period of their choice. There is no standard limit in this regard, and it tends to depend on the relationship between the client and the broker. However, across all brokerages, it usually extends up to a maximum of 2 to 3 months. Now, the securities they buy via margin funding will have to be pledged to the broker. According to the Securities and Exchange Board of India (SEBI), traders need to complete this process within 9:00 PM of the date of purchase. In case they fail to do so, brokers have the right to square off their assets in T+6 days. Interest will be applicable on the margin amount from the second day after placing a margin trade offer. This process will continue till traders square off their positions and settle the outstanding amount. In case the margin amount against the value of securities declines, individuals will have to deposit additional assets or cash to maintain the minimum margin amount. They can also sell off some of their assets in order to offset the difference. Failing to do so, brokers have the right to make a margin call. Under such circumstances, individuals will have a specific number of days to restore the minimum margin value. Additionally, brokers can liquidate some of the assets in order to restore the minimum amount.

Essential Points to Remember Regarding Margin Funding

Mentioned below are some of the essential points you must remember while opting for margin against funding:

• Not Available for All Stocks

One of the most important things you need to remember for margin funding is that it is not available for all stocks. SEBI has a master list that contains names of the allowable stocks in this regard. Furthermore, brokerage firms can fine-tune this list as per their preference. Thus, it is always a good practice to check the list of stocks for which your broker provides the margin trading facility before planning your trades.

• Only Offered by Corporate Brokers

As per SEBI guidelines, only registered corporate brokers are eligible to offer margin funding. Brokerages structured under partnerships or individual brokers are not allowed to provide this service to their clients.

• Haircut for Equity Collateral

When you offer equity as collateral for covering the minimum margin balance, your broker considers their value after a nominal haircut of 40% to 50%. So, it is always a good idea to offer a combination of cash and stocks in order to cover this amount.

Advantages of Margin Funding Facilities

Here are some of the advantages of using margin funding:

• Fast and Instantaneous Credit

Once you enable margin against funding in your trading account, you do not have to apply for this facility each time you want to buy stocks on margin. This will enable you to capitalize on opportunities whenever they arise without an unnecessary delay.

• Convenient Interest Rates

When you opt for margin funding, the broker accepts the securities you purchase as collateral. This makes it a secured credit option, having a far more convenient rate of interest in comparison to personal loans.

• Improves Rate of Return on Invested Capital

Margin funding enables you to avail of credit by offering stocks present in your Demat account as collateral. This improves your chances of availing better returns on your invested capital.

Enjoy 33X Intraday Leverage With Samco

To ramp up your trading game with a margin against funding, it is important that you choose the right brokerage platform. In this regard, the New-Gen Samco app is all you need. Some of the benefits of trading with Samco are as follows:

• • 4X margin for equity delivery.
  • 20X for options.
  • 33X for intraday trading.
  • 80X for commodities.
  • 100X for futures.
  • Brokerage charges at ₹20/executed order.

Furthermore, you get access to advanced analytical charts and tools, along with smart alerts and notifications. So, download the Samco app today and take your trading game to the next level!

Conclusion

Margin against funding is an excellent way to amplify your profits. However, mistakes in this regard can be very costly, leading to heavy losses. Thus, while starting out, experts advise borrowing less than the maximum amount. Start with small trades, gain confidence, learn from your mistakes, and with time, you can start utilizing higher margin amounts. Furthermore, make a habit of keeping extra cash in your margin account and regularly checking your margin usage. By doing so, you can ensure that the broker's margin balance is always maintained, thus avoiding instances of margin calls. So what are you waiting for? Join Samco today and start your stock market journey with confidence. Click here to open your free Demat account with Samco now.