A term that is becoming very popular among today’s smart traders is margin funding. If you’ve ever wondered how to build a large portfolio with limited capital, margin funding could be an excellent solution. In simple terms, it allows you to borrow funds from your broker, increasing your buying power and enabling you to take larger positions than your own capital would allow.
In this blog, we will talk about what is margin funding means, what is its role in trading, and its pros and cons in full detail.
Margin Funding Meaning Explained
Margin funding is a method through which you can make big investments with less capital. In simple words, your broker lends you money so that you can buy shares of higher value than your capital would usually allow. This funding increases your purchasing power.
Suppose you have ₹30,000 but you want to buy shares worth ₹1,00,000. In such a case, your broker will give you the remaining ₹70,000 in the form of margin trading funds. In return, a small interest will be charged from you and your shares will be kept as collateral.
This system is not like a personal loan because these funds can only be used for trading and your stocks you buy using it are kept as collateral. It can be called a kind of short-term trading credit which is given only to create trading positions in the market. Today many big brokers are providing this margin trade funding facility so that even small investors can make big trades; but it requires prudence and risk management.
Read Also: What is Stock Margin?
How Margin Trade Funding Works?
Margin Trading Funding works in the following ways:
Step 1: The investor invests his capital
At the beginning of the trade, you have to invest a part of the total investment amount yourself, which is called initial margin. This usually ranges from 25% to 50%, depending on the rules of the stock and the broker.
Step 2: The Broker funds the remaining amount
The remaining amount is given by your broker in the form of margin funding. This increases your buying power.
Step 3: Interest has to be paid on funding
You have to pay interest on this funding amount. Most brokers charge 12% to 18% per annum, but Pocketful is offering margin trade funding facility as offering margin trade funding facility at a very low interest rate, i.e. 5.99% per annum. This is beneficial for those traders who want to trade smartly at low cost.
Step 4: Shares are pledged
Your purchased shares are kept as collateral. If the market falls and the value of your portfolio goes below the set limit, the broker can make a margin call. If you do not deposit the required funds on time, your holdings can be sold.
Step 5: Profit or loss is calculated on the entire trade amount
Your profit or loss is calculated on the entire trade value, not just the amount you have invested. Therefore, margin funding increases the risk along with the benefits.
Understand with an example:
| Details | Value (₹) |
|---|---|
| Total Trade Value | ₹1,00,000 |
| Your capital (55%) | ₹55,000 |
| Funding from broker (45%) | ₹45,000 |
| Interest rate (Pocketful) | 5.99% p.a. |
| Profit/Loss Calculation | It will be for full ₹1,00,000 |
Key Terms You Must Know in Margin Funding
If you are thinking of starting trading using margin funding, then it is very important to understand some basic terms. These terms will not only improve your understanding of margin trading, but will also help you in risk management. Let’s understand them one by one in simple language:
- Margin : Margin is the amount that you have to invest yourself to begin margin trading. It is also called initial margin or upfront margin. It is usually 25%-50% of the total trade value.
- Leverage : Leverage means trading more value with less capital. Through margin funding, you can increase your purchasing power by taking a loan from the broker. The higher the leverage, the higher the risk and return.
- Interest Rate : The interest on money you take from the broker as funding is charged a fixed interest rate. This rate may vary depending on the broker. For example, Pocketful charges just 5.99% per annum, while other brokers may charge up to 12%-18%.
- Pledge/Collateral : When you take margin funding, the shares purchased using the broker funds are pledged. That is, these shares remain pledged with the broker until you sell and repay the funding amount.
- Margin Shortfall : When the value of your portfolio falls below the minimum required margin, it is called margin shortfall. In this situation, the broker may ask you to deposit additional funds, which is called a margin call.
- Liquidation : If you do not deposit additional funds on time, the broker may sell your shares. This is called forced liquidation.
Before starting trading,it is important to understand all these terms properly because even a small mistake can cause a big loss. Use Margin funding only when you understand all its aspects.
SEBI Regulations Around Margin Funding in India
Margin Funding or Margin Trading Facility i.e. MTF allows investors to buy more shares with less capital. SEBI has laid down strict and clear rules regarding this facility so that investors remain safe and the entire system remains transparent. Below, all the main aspects related to this facility are explained in detail.
- Eligible shares and securities : SEBI has declared only Group-I stocks and certain equity ETFs are eligible for MTF. Margin on these stocks is determined on the basis of Value at Risk (VaR) and Expected Loss Margin (ELM). The margin amount is calculated as VaR + 3 * ELM for F&O stocks and VaR + 5 * ELM for non F&O stocks.
- Initial margin required : Client is required to provide minimum initial margin in the form of cash or eligible securities to avail MTF. If the value of the portfolio falls below the prescribed limit, the broker can make a margin call and recover by selling the client’s holdings if needed.
- Limited sources of funding : Brokers can raise capital for MTFs from only four authorized sources: own capital, bank/NBFC loans, unsecured loans from promoters or directors, and regulatory approved commercial papers.
- Safe holding of shares : Shares purchased using MTF are held in a separate Demat account and the entire process of Pledge/Re-pledge is done electronically as per SEBI regulations.
- Daily reporting mandatory : At the end of every trading day, the broker has to send details of all MTF positions and exposures to the exchange by 6 pm, thereby maintaining transparency.
These rules made by SEBI are not only to protect the investor but are also necessary to keep the entire stock market system stable and transparent. MTF is a great facility but it is beneficial only when both the investor and the broker follow the guidelines of SEBI completely.
Pros and Cons of Margin Trading Funding
Pros of Margin Trading Funding
- Increased investment capacity : The biggest feature of MTF is that it gives you the power to buy more shares than your capital would allow. For example, if you have ₹1 lakh, you can take a position of up to ₹3-4 lakh.
- Significant Profits in the short term : For active traders, MTF can help in earning quick profits, because by taking big positions for a short time, one can benefit even from small price movements.
- Better fund utilization: With Margin Trading Funding (MTF), you can free up your cash for other investments while still gaining greater market exposure, even with a smaller upfront amount.
- Funds are available for long term also : Earlier MTF was used only for short term trading, but now some brokers are providing funding for up to 365 days.
Cons of Margin Trading Funding
- Risk of huge losses : If the market goes against your trading positions, the losses can be much more than your investment amount, because you are trading on credit.
- Interest Charges: The broker charges interest on MTF. This interest can reduce your profits, especially when your trading positions are not very profitable.
- Margin call and force selling : If the price of stocks falls below a certain limit, the broker can make a margin call. If you do not deposit the required funds on time, your holdings can be sold by the broker.
- Overtrading : Leverage often encourages investors to trade more than necessary, which can result in significant losses over the long term.
Read Also: Lowest MTF Interest Rate Brokers in India | Top 10 MTF Trading Apps
How to Apply for Margin Funding Facility with Your Broker?
To start margin trading funding, you have to follow some easy steps. This process is completed online on most broker platforms and can be activated in a few minutes.
- Open a Demat and trading account : To avail MTF, first you have to open a Demat + Trading account with a broker that provides margin trading facility.
- Submit the required documents : Documents like KYC, PAN, Aadhaar, income proof have to be submitted. These brokers decide the funding limit based on your income and risk profile.
- Accept the risk disclosure : Margin trading involves high risk, so it is important to read and agree to the Risk Disclosure Document provided by the broker.
- Activate the Margin Pledge system : Under the new rules of SEBI, you have to activate Demat Debit and Pledge Instruction (DDPI) before using MTF. You can complete this process online from your trading platform.
- Start Trading: After completing all the above steps, you can start trading using the margin funds.
How to get MTF with Pocketful?
If you are looking for easy, transparent and affordable margin trading, Pocketful is a great option for you. On Pocketful:
- You get MTF through Pocketful’s “Pay Later” feature, starting at just 5.99% per annum, the lowest in the industry.
- The funding period is for 365 days, allowing you to hold your trading positions for a longer time.
- The entire process is 100% digital and fast.
Check Out – Stocks Available for MTF
Conclusion
Margin Trading Funding (MTF) is a great way to trade more with less capital, but the risk is also significant. When combined with proper risk management and thorough research, margin funding can potentially enhance your returns. In today’s digital age, platforms like Pocketful are offering margin funding through its “Pay Later” feature in an easy, transparent and affordable way. But before making any trading decision, it is important to consult a financial advisor.
Frequently Asked Questions (FAQs)
What is Margin Trading Facility in trading?
Margin Trading Facility or MTF allows you to buy more shares with less money by using funds provided by the broker.
Is margin trading risky?
Yes, there is more risk in it because the losses can be significant if the market value of your investment decreases.
Can beginners use MTF?
Beginners should first understand the basics and gain market experience before using MTF.
How much interest does Pocketful charge on MTF?
Pocketful’s MTF interest rate starts at just 5.99% annually, which is the lowest in the industry.
Can I apply for MTF online?
Yes, you can activate MTF online on most brokers platforms.
