Marginal Trade Funding: Meaning, Benefits, Feartures & How its works

Every investor is constantly looking for strategies to improve their market position. However, one common challenge in trading is the limitation of capital. As a trader, you might be wondering how you can make larger trades without increasing your cash outlay. 

The answer to this question lies in margin trade funding. This powerful financial tool helps you overcome cash shortages when trading. Let's explore what is margin funding in trading, its features, and its key benefits. 

What is margin funding in trading?

Margin funding, or margin trading, is a facility that lets traders borrow funds from a brokerage firm to purchase securities. It enables you to leverage your investment by using borrowed money to increase your trading position beyond what would be possible with your available cash resources alone. The securities you purchase act as the collateral for the loan. 

How does the account work?

A margin trading account allows investors to trade using borrowed funds from a broker, with the securities they purchase serving as collateral. To begin with, investors need to open a margin account to access the borrowed funds. 

However, to set up the account, the investor must meet the eligibility criteria of the brokerage firm. This involves verifying personal details, submitting the necessary documentation, and understanding the terms and conditions. 

Once the account is set up, investors must deposit an initial margin—typically a percentage of the total value of purchased securities—into their account. Further, the investors must also maintain a certain level of funds in the margin account, known as maintenance margin. This is determined as a certain percentage of the total value of securities and acts as a safety net for the investor to ensure they have enough funds to cover potential losses.

If the account does not have the required maintenance margin, the broker issues a margin call, which requires the investor to either deposit additional funds or sell off assets to restore the margin balance.

Components of margin trading

Let's explore the major aspects of margin trading-

1. Investors who want to use the margin trading facility need to share an undertaking agreeing to all the terms and conditions related to an MTF. This facility is available within the same trading and Demat account you already have, not in a separate account.

2. Traders using the margin trading facility can provide their margin in cash or by offering shares as collateral.

3. The margin trading facility allows investors to buy more securities than their available cash usually permits. This is particularly useful for non-derivative trades where future leveraging isn't allowed.

4. There's no fixed time limit for how many days a position can be held and carried forward. It depends on the broker's policies and the relationship with the client. Clients with a strong relationship or pay more in brokerage fees may get extra benefits, usually extending up to 2-3 months.

5. Brokers cannot offer margin trading for all stocks. SEBI provides a master list of eligible stocks, but brokers often apply their own rules and restrict the list further for safety reasons.

6. Only corporate brokers registered with SEBI can offer margin trading. Individual brokers or partnership firms are not allowed to provide this service.

Features of margin trade funding

Margin trading is an excellent strategic tool for traders who wish to capitalise on market opportunities. Here are some key features that highlight what margin funding in trading is all about:

1. Leverage: By borrowing funds, traders can leverage their positions to make larger trades. This means even with a limited amount of capital, you can potentially amplify your market exposure and your returns.

2. Flexibility: Margin accounts allow traders to trade various securities, including stocks, bonds, and other investment instruments. 

3. Market accessibility: With increased buying power, traders can access markets or securities that may have been out of reach. This lets you capitalise on market predictions. 

4. Interest costs: While margin trading amplifies potential returns, it also comes with interest costs on the borrowed funds. Understanding these costs allows you to manage your overall profitability. 

Benefits of margin trade funding

The strategic use of margin funding can open up a host of advantages for traders. Here are some benefits worth considering:

1. More buying power: The most immediate benefit of margin trading is increasing your buying power. This allows you to make larger investments with a fraction of your capital.

2. Potential for higher returns: With increased investment size, even small price movements in the market can lead to significantly higher returns. However, remember that the risk associated with this is higher. 

3. Portfolio diversification: Margin funding can facilitate portfolio diversification. A diverse portfolio lets you spread your investments across a broader range of assets without investing large sums of cash.

4. Short selling capabilities: Margin accounts allow for short selling, where you can sell securities you don't own with the expectation of buying them back at a lower price. The goal of this is to profit from potential price declines.

Who is eligible for margin funding?

The following individuals are eligible for margin funding-

1. Active traders

Individuals frequently invest in the stock market and have a proven track record.

2. Experience investors

Investors with years of experience and a great understanding of the risks associated with leveraged trading are more likely to get approval.

3. Creditworthy investors

Investors must have a good credit score to be eligible for marginal trading, as it involves borrowing funds.

4. Account holders with minimum equity

Applicants must maintain a minimum level of equity in their trading account as specified by the broker.

5. Meet brokerage requirements

Each brokerage has established its own set of requirements for investment expertise or financial statements, which the traders must meet to qualify for MTF.

Final thoughts

Margin trade funding offers a potent mix of increased buying power, potential for higher returns, and strategic investment opportunities. However, it's essential to approach margin trading with a thorough understanding of the risks and costs involved.

If you want to explore margin trade funding or other investment strategies, Tata Capital Moneyfy Mutual Fund App is your go-to application for making strategies. With an interactive interface and a plenty of resources, Moneyfy makes discovering the right investment strategy easy and accessible. 

Visit the Tata Capital Moneyfy website for more details and begin investing today!  

FAQs

Are there different charges for MTF?

Margin trading funding (MTF) involves charges such as interest on the borrowed amount and equity delivery charges.

Can you get your margin money back?

The margin money can be used to borrow money against the amount in the account as a short-term loan.

Is it a good choice to margin trade?

Margin trading can be profitable when markets perform well, but it carries significant risk with potential for loss.

What is the penalty for unsettled funds?

Penalties include penal interest, additional charges, and blocking of margin account if the minimum margin is unpaid.

How does margin funding take place?

Margin funding is a short-term borrowing facility where brokers lend money to investors to buy securities. The brokerage charges interest from the investors for borrowing the funds.