As the world is becoming increasingly inclined toward attaining a secure financial future, wealth-making strategies, such as stock trading, have been on the rise. While the core concept of stock trading remains ‘give money to grow money,’ there could be times when an investor may not have enough funds available to put into different stocks of their choice. That’s when margin funding facilities lend a helping hand.
What’s Margin Funding?
Margin funding is a short-term loan facility where an investor requests funds from an online investment app or a broker to buy shares. The borrowed amount, also called the margin, comes with an interest rate that varies between different brokers or platforms.
How to Obtain Margin Funding?
Generally, an investor would be required to open a margin account after they open Demat account and a trading account. A margin account can be thought of as a loan account, where the broker would lend money to the investor. The amount would be collateralized from the existing stocks or securities that the investor owns. An investor may have to pay a certain sum when opening a margin account.
Benefits of Margin Funding
- Increased purchasing power: Seasoned investors know the importance of taking action on trading opportunities as they arrive. If an investor is using a share market app to trade in stocks but has fewer funds available with them, they may borrow funds from the broker or the platform to purchase certain stocks when the time is right. This approach eliminates the chances of an investor missing out on profit-bearing opportunities. Furthermore, it helps the investor stay aligned with their long-term trading strategies and goals, even when there’s a shortage of funds.
- Higher returns: If an investor acts on opportunities timely, they may get to reap higher returns through a share trading app that offers margin funding. In this case, the cost of margin trading becomes justified because the investor gains more even after the repayment deductions.
- A more suitable way of acquiring funding: If an investor is using an online trading app that doesn’t offer a margin funding facility, the most obvious step for them to secure funding would be borrowing a personal loan from a third party. There are certain repercussions of personal loans that make them less favorable than margins. Examples could include higher interest rates, complicated terms, and other additional fees. Since margin funding is highly specific to stock trading, it becomes a more suitable option than other forms of credit.
Consideration of Margin Funding
Margin Funding should be thought of as a privilege rather than the norm. Rash funding decisions may result in an investor incurring a net loss on their selected stocks, eventually putting them in a tough position to make up for the amount borrowed. Consequently, they may have to liquidate their investments unwillingly or untimely when the broker initiates a margin call.
To conclude, the air around responsible borrowing and trading has become clearer with the introduction of margin funding facilities that amalgamate both responsible borrowing and trading. In a financially volatile environment, investors are now required to possess not just a trading and Demat account but also a margin account to equip themselves with the necessary means to continue their investment journey. Before indulging in margin trading, every investor must thoroughly understand the process and weigh the pros and cons.