Did you know that you can buy stocks even if you do not have sufficient funds? The trading market changes every day. Sometimes, buying stocks could become difficult for a trader like you, because of lack of funds. In cases like these, what can you do? Will you have to forgo the amazing deal or is there an alternate option? Let us look at an interesting possibility, called margin funding/trading that can help a trader buy the stocks they want, despite having insufficient funds.

What is Margin Funding?

Much like we take loans from banks to buy things we do not have enough funds for, traders can also borrow money from dealers and buy the stocks of their choice. Generally, big companies have higher margins on their stocks, and smaller companies have less margin on their shares.

Margin funding is not available on all the listed stocks. SEBI (Securities and Exchange Board of India) offers the list of stocks eligible for margin funding. This list is further tuned by brokers on the basis of what securities they expect, and what limits they are comfortable providing.

Understanding with an example

While borrowing money, you have to place an order with a minimum margin and the rest will be provided by your broker. The money thus, provided to you, will come with a certain interest that you will have to pay back along with the money borrowed.

To understand this better, we can look at the following example –

Imagine that you have to buy some stocks from a company ‘Y’. The price of that stock is ₹4000, and you want to buy 4 shares. Now, you lack funds for 4 quantities, so you decide to get margin funding and contact your broker. In this case, your broker gives you a “4 times limit” i.e., the capacity to buy 4 quantities. Here, you will have to pay for 1 quantity and the rest will be covered by your broker.

Also Read: How to Make Smart Stock Market Investments

Simply put, for the price of one stock you can buy 4 stocks. With calculations, you will have to pay ₹4000, and you will be borrowing ₹12,000. On the borrowed money, your broker will charge you some interest or brokerage per day, say 0.05%. That translates to ₹6 rupees each day, till you pay back the money you borrow.

Margin trading is usually provided only on intraday trading. Fewer brokers provide margin trading for position or swing trading, and almost no one provides the money for long-term investments.

How does one facilitate Margin Funding?

In order to borrow money from your broker to buy stocks under margin funding, you have to have a trading account. This account doesn’t have to be a separate trading account and can be a part of your existing one. When in possession of a Demat account, you can apply for margin trading via the online services they provide, or you may contact the firm’s advisor.

Once done, all you have to do is check the margin on the stock you want to buy. Do make sure that you confirm the margin from your broker as well.

How safe is it to take Margin Funding?

Under intraday trading, we can earn decent profit with Margin Funding. However, if it goes wrong, you might have to face substantial losses. To understand this better, we can use the following example –

You have ₹10,000 and you want to buy stocks of ‘X’ priced at 100 rupees. With your funds, you can buy 100 stocks. However, if there is a limit of 5 provided by your broker, you can buy 500 stocks. That is, with ₹10,000, you can buy shares worth ₹50,000.

Now, if the share price of the stock increases by ₹50, you can sell the stocks you own and get a good profit. But if the same decreases by ₹50, you will incur a loss.

Therefore, it all depends on how carefully you have studied the stocks and how willing you are to take risks. Even if the broker provides you with a flexible limit, you cannot let the notion of ‘higher profit’ deter you. It is advised to study the extent of risk you can take and invest accordingly.