What is Margin Funding and how does it work exactly

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What is Margin Funding and How does it work exactly?
August 1, 2020  Suresh KP
What is Margin Funding and How does
it work exactly?
Stock markets are volatile and often
create dangling situations for investors.
Investors need funds to make investment
and mount up their gains, but funding
hindrances often make it difficult. That’s
where margin funding comes to help the
investors. It simply gives investors more options for funding when they have not any. What
is Margin Funding? How does Margin Funding work? What are typical interest rates
charged by brokers in margin funding?
Also Read: What you should know before opening Demat Account?
What is Margin Funding?
It is basically a concept that allows investors to keep trading irrespective of the shortfall in
funds. Margin funding gives a short-term loan facility that can simply ease up the fund
shortcomings. Investors who are trading in futures, options, or stocks can be benefited from
this form of funding. Below video can help to under margin funding better.
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This loan facility is provided on a pre-determined interest rate, which is paid to the
brokerage. The investors must have a Demat account to avail the loan; they can either
connect to the brokerage firm or go online and apply on the agency’s site.
How does margin funding work?
A majority of the brokerage needs a 50% margin to trade from the investor. Let’s take an
example: if company X has its share priced at INR 1,50,000 and you wish to purchase them,
you would need to present INR 75,000 as brokerage to cover the investment. You can also
use the shares from your Demat account as collateral rather than paying in cash.

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What Are The Interest Rates of Brokerage?
Depending upon the relationship with clients and their investment quality, the brokerage
interest rates can vary between 15-18%. Investors with large capitals who share a good
relationship with their brokers are likely to bag cheaper interest rates. However, to mitigate
the risk of market volatility during crisis times, brokerages might increase their interest rates.
So, it depends on both the market situation and the clients’ relation.
What happens when the share value falls abruptly?
It is one of the major concern areas for investors who have invested in shares with margin
funding. In case, the share prices fall that you have purchased with margin funding, then the
maintenance will be activated. It is a minimum amount that you, as an investor, need to
keep with the brokerage for such unpredictable events. Generally, the maintenance margin
amount is calculated from the percent of the market value of securities from the previous
trading day’s closing value. The brokerage is allowed to liquidate the position if the margin
goes below the limit, and the margin call is not attended.
You may also like: How to invest in stocks and successful like Rakesh
Jhunjhunwala?
What is a Margin Call?
It is an alert given to the investors when their margin account goes low on funds because of
losses. It requires additional capital to maintain the minimum balance in the margin account
and further proceed with the trading.
Margin funding is certainly a blessing is a disguise for investors who are keen to diversify
their investment potentials. Once you have understood the benefits and working of this
funding, you can make the most of it in your trading.

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Suresh KP
I have done my Post Graduation in Finance. I have over 20 years of experience in
analyzing various investment options and money saving ideas in India. I love doing
financial planning, Mutual Fund Analysis, Searching long term Stocks for wealth
creation, IPO Reviews, Analyzing Life Insurance and Health insurance Plans etc.

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