What is Margin Funding, and How Does the Account Work?

The main aim of margin trading funding is to help investors invest in stocks or shares that cost more than their current funds permit. This is done by borrowing money from their stockbroker. With this facility, investors gain a larger position which ends up increasing their profits. A nominal interest rate is charged on the borrowed money by the stockbroker. 

How Margin Trading Funding Works

A margin trading funding account is not a separate account but a part of the Demat account the investor already owns. To open a margin funding account, a trader or investor has to place a request with their stockbroker.

The right stockbroker will provide investors with this facility on their website or their mobile application. A minimum balance needs to be maintained in this margin account as specified by the stockbroker. This balance is called the minimum margin. 

To make a trade, traders will invest a small percentage of the total stock amount, usually 20%, and the rest 80% funded by the stockbroker, is deposited into the MTF account of the investor. This amount is a loan that the stockbroker provides the investor against the collateral of the purchased securities or cash. 

Here’s an example to demonstrate the margin trading funding process:

• An investor wants to buy shares worth ₹1,00,000 but only has ₹20,000. 
• This ₹20,000 is called the margin, which is paid to the broker before buying. 
• The stockbroker then funds the rest, ₹80,000 in this case, making it a total of ₹1,00,000
• The investor then has to pay the interest on the margin or collateral they have deposited with the broker.

When a trader decides to purchase stocks/assets with the margin funds and the securities purchased find appreciation above the interest percentage on the funds, then investors earn more profit when compared to what they would have earned had they purchased the shares/assets with their own money. 

Stockbrokers charge an interest on the margin fund till the loan remains outstanding. The longer the loan is outstanding, the greater the cost of buying the securities. If the value of the securities decreases, then the investor has to pay an interest on top of the loss to the broker. 

Some of the Major Components of Margin Trading Funding

To understand margin trading meaning, it is important to understand what its components are. Below is a list of some of the major aspects of Margin Trading Funding:

• When investors are looking to avail of the margin trading facility, they need to provide an undertaking stating that all the terms and conditions associated with WTF are acceptable to them. 
• Traders or investors availing MTF are free to provide their margin amount either through cash or the shares in their account as collateral
• Only corporate brokers registered with SEBI are allowed to provide their clients with margin trading funding. Individual brokers cannot offer it. 
• Not all stocks listed on the stock exchange can be invested in through MTF. The main master list is defined by SEBI. This list is then further sorted by the stockbroker to help them make the safest decision. 

Benefits of MTF

The benefits of availing the margin trading funding are listed below:

• Leverage Market Position:

With the help of MTF, investors can buy larger stocks at a fraction of the actual stock price. This helps build their leverage and enables them to take advantage of any small movements in the market.

•  Short-Term Wealth Gain:

If you are an investor looking to make a profit through short-term gains, thanks to short-term fluctuations in the market, MTF is the best facility to opt for. 

Conclusion

Margin Trading Funding, when done right and with the right stockbroker, can be a very beneficial tool in helping an investor make profits with very little investment.

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