How Does a Demat Account Facilitate Margin Funding in Trading?

Margin trading plays a key role in pushing the profit margins for investors by allowing them to invest in securities and assets beyond their purchasing capacity. 

Margin trading using a Demat account brings transparency, convenience and cost-effectiveness into trading. 

This remarkable feature has resulted in an unprecedented increase in the number of investors opting for a Demat account to facilitate margin trading. Did you know in March 2024 the total number of Demat accounts hopped to a whopping 15.1 crores? 

Margin trading is indeed a feature that adds to the popularity of a demat account. Tag along as we discuss margin funding with the Demat account and investing risks that you must be mindful of. 

Understanding Demats and Margin Funding

The stock market does not have a pre-decided time slot for positive investment opportunities. Investors can find a golden investment opportunity at any point and an insufficient fund holds them back from investing. 

This is where margin funding or MTF helps investors by allowing them to buy securities and pay for them later. These securities are mostly kept as collateral for the loan provided by brokers, however, investors can sell the security to gain profit and return the loan amount. 

MTF is funded by brokers who provide an extended buying capacity to investors based on their existing value. With an open Demat account, your margin account gets funded to a wide extent.

Advantages of Margin Funding with a Demat Account 

Margin funding is majorly used by investors for short-term profit generation and leveraging the market situation. When you choose to use your Demat account for margin funding, the added benefits include:

•  Accessibility

A Demat account is the central space for all your investments that allows the broker to analyse your investment and financial portfolio better before providing your funds for MTF. Your Demat account facilitates easy access to brokers and increases the chances of getting desired limits.

• Share pledging

When you buy shares using margin trading funding, the shares that go beyond your buying capacity are kept as collateral. 

However, with your Demat account, these shares will be available in your account, as per SEBI rules. This allows you to create a better investment portfolio for future opportunities.

• Intraday margin trading

Intraday margin trading is the biggest drawing factor for investors using MTF. Under this, securities are bought and sold the same day and investors need a portion of the total cost of the securities as collateral and the burden of interest rates are minimal. 

A reliable Demat account like Bajaj Trading allows a user-friendly interface for intra-day margin trading.

Things to Keep in Mind When Opting for Margin Funding 

Managing risks in margin trading/MTF is a skill that you must learn as an investor. While margin funding brings you the opportunity to leverage market position, there are risks attached to it. Read on to find things that you should be mindful about:

• Invest wisely

Margin funding comes along with the risks of magnified losses because a loss in margin funding implies a burden on you that you can not afford. The thumb rule, therefore, is to invest wisely i.e. invest only when you are financially capable of bearing the loss, if any. 

• Borrow less than your limit

Brokers can lure you into borrowing a huge amount to invest in the stock market which brings you under the burden of repaying a lot beyond your capacity. The ideal approach is to always borrow less than what you are competent for. 

• Focus on short-term borrowings

In margin funding, you are granted a loan that comes with interest rate charges. A broker might allow you to take a loan for a longer period, but remember that at the same time, the interest rates are also increasing and you might end up repaying a lot more than what you borrowed. For successful margin funding, you should focus on short-term borrowings.

Apart from the above-mentioned points, ensure that you are updated with SEBI rules on margin funding and investing in compliance with the same.

Conclusion

Margin funding can bring desired profits if the investor understands the risks associated with it. Being mindful about borrowings, investments and SEBI rules should be the first three questions that must be answered before opting for margin funding.

A Demat account with Bajaj Broking that allows transparency and a wide window to find reliable investment options that can simplify margin funding for both beginners and experts in the stock market.