Derivatives Trading Basics
by 5paisa Research Team Last Updated: 2022-06-15T16:41:10+05:30

Introduction

How often do you identify good opportunities in the market only to realise that your account balance holds you back?

Well, you can pour money into the trading account from your bank account. But what if there's another way to buy more stocks, futures, or options contracts without emptying your bank account? 

You are right; we are talking about margin funding. Margin funding, also known as margin trade funding, refers to the facility through which you can get additional funds for investing in the stock market.  

The article explains the meaning of margin trading funding and enlists the many benefits of margin funding.

The Meaning of Margin Trading Funding

Margin funding or margin trade funding is a special type of collateral-backed loan provided by Indian stockbrokers. To get the facility, you need a margin-enabled trading account. Margin funding is basically the shortfall between the trade amount and the available balance in your trading amount. Let's understand margin funding with an example.

Suppose you have INR 10,000 in your trading account. You have identified a stock with immense growth potential. The stock is currently trading at INR 1000 per share, meaning you can buy only 10 shares with the balance. However, if you want to buy 20 shares, you can request margin funding from your broker (provided your broker offers that much leverage). The extra INR 10,000 you thus get will be known as margin trade funding.

Generally, you can get margin funding in two situations:

1. When your account balance exceeds 50% of the net trade amount, you can avail of the margin funding facility. 

2. When you hold shares in your Demat account.

However, it is always prudent to inquire about the margin funding eligibility before placing a trade.

What Are The Benefits of Margin Trade Funding?

Margin funding has its share of risks and benefits. For instance, over-leverage might burden you with uncontrollable debt if your predictions go wrong. Moreover, every time you avail of margin funding, you have to pay interest to your broker. However, despite the risks or downsides of margin trade funding, investors and traders frequently use this facility to trade efficiently. 

1. Utilise Your Asset

The broker takes your shares or cash as collateral when you buy shares on margin. This helps you realise the true worth of your shares or cash. For example, if your Demat account has shares worth INR 10,000 and your broker offers a 5X margin, you can buy shares worth INR 50,000 by using the shares as collateral. 

2. Convenient Credit

If you have a margin-enabled account, you can borrow funds for share market investments at any time. Unlike a loan, you do not need to fill out forms or submit applications every time you borrow money from the stockbroker. Once you settle the existing debt, you become automatically eligible to apply for a new margin. 

3. Low Interest Rate

Unlike non-collateral loans like personal loans or credit cards, margin trade funding is collateral-backed. Hence, the interest rate is usually much lower than conventional non-collateral loans.

Open a 5paisa Demat Account to Experience Low Brokerage 

To understand the real meaning of margin trading funding, you need the right broker. 5paisa is a reputed Indian stockbroker providing services like free Demat & Trading account, low brokerage, high margin funding, and a host of distinctive features. Open an account now to experience next-gen investing.

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