Margin Trading Fund, its Components and Benefits

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
• Conclusion
• Frequently Asked Questions

Beyond Traditional Investing: Exploring Margin Trading Funds for Growth

If 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 Funding 

Just 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 Fund

There are several components of a margin trading fund, which have been discussed below:

• Minimum margin

It is the minimum balance that you will have to maintain in your account for a margin trade. If your balance at any time falls below the minimum margin, the broker can square off the trade with or without informing you. It is to make sure that the broker doesn’t lose their money in case your trade goes into loss.

•  Initial Margin

Depending upon the broker, every brokerage firm has a limit set for the initial margin. It is the minimum amount you will have to contribute to be able to borrow funds from the broker and execute your trade.

• Margin call

When your minimum balance is about to fall short, the brokerage contacts you to add more funds to your account. This is called a margin call, and it could be made via calls or emails.

Benefits of Margin Trading Fund

There 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 Trading

While 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.

Conclusion

Margin trading fund is a lucrative but risky trading option, and as a trader, you must possess good trading skills to ensure profitability. However, despite the skills, due to the involvement of high risk and volatility, you can still end up suffering losses. Margin trading requires not only good trading skills but also a high-speed trading platform that is meticulous and assists your trades. With the New-Gen Samco trading app, you can avail the CashPlus facility, which allows you to leverage trades of up to 4x your capital.

Frequently Asked Questions

Q1. What is the minimum initial margin I need for margin trading in India?

Ans. As per the guidelines issued by SEBI, the minimum initial margin that every trader shall have to maintain is 20%. Your brokerage firm can, however, further increase this margin.

Q2. Can my broker take action against me if there is any unsettled margin trading fund?

Ans. The brokerage firm has the right to levy penal charges, additional interest or even block your margin account if there are unsettled funds. Additionally, they can also sue you if you do not settle your debts.

Q3. Can my loss go beyond my capital investment in margin trading?

Ans. Yes, it can. If you lose your entire capital in a loss-making trade, you will still have to make the interest payment to the brokerage firm over the loss of your capital. Depending on the circumstances, it could include other charges as well.