Margin money is the amount paid by the trader when the broker funds part of an eligible trade. This is the trader’s initial contribution to the Margin Trading Facility or MTF. It can assist with trade planning, showing how much capital is committed, how much is funded and what costs there may be before a position is taken.
MTF involves leverage, so it’s important to understand margin money. The trader does not pay the full value of the shares in advance. The broker will fund the rest but the trader must still put up the margin required. This structure can impact the use of capital, risk, cost of interest and exit planning.
What is the meaning of margin money in MTF?
Suppose the purchase of a share is ₹1,00,000 in total and required margin is 30%. The trader puts in ₹30,000 as margin money and the broker puts in ₹70,000.
This in no way diminishes the value of the position. The trader remains exposed to the full ₹1,00,000 trade. The value of the whole position is affected by any movement in price. Interest might also be charged on the funded portion.
How Margin Money Helps You in Trade Planning
- Place the trade with the capital set up before
First, look at the total value of the trade and the margin percentage needed. That is the amount that must be available in the trading account. It also helps to prevent a trade from tying up capital that could be used for other positions or obligations.
- Calculate the funding amount
Take total trade value and subtract margin money. The balance is broker funding under MTFs. With this figure a trader knows the size of the funded exposure.
So, if the trade value is Rs 80,000 and margin money is Rs 24,000, then the funded value is Rs 56,000.
- Calculate the Holding Cost
An interest charge is normally applied to MTF funding. The cost depends on the amount funded, the rate of interest and the holding period. So a trade plan should include the expected interest cost not just the stock price.
This can help readers compare different holding periods and understand how the cost of financing can affect the outcome of the trade.
- Maintain margin change buffer
The required margin may be changed by market conditions and the applicable risk parameters. A margin deficit can also be caused by a reduction of the funded stock. A trader can allocate some uncommitted capital to prepare for such changes.
If the required margin is not kept, the broker can make a margin call or liquidate the position according to the applicable terms.
- Plan the Exit Before You Enter
Entry price, holding period, interest cost and exit level should be considered along with margin money. This provides a defined context for the trade.
Before you use MTF, a trader can ask four simple questions: What amount of capital is being committed? What’s the investment? What’s the approximate price tag of the job? What if the price moves against the position?
- Verify if the stock is eligible
MTF Not available for all stocks Brokers publish a list of securities eligible under the facility. If you check eligibility before you plan the position, you can avoid last minute changes in capital requirement or order type.
Margin Planning – Bajaj Broking
Bajaj Broking provides an MTF facility and an MTF calculator. Traders can input details such as stock, quantity, market price, required margin, interest rate and holding period into the calculator. Then it shows figures like amount of funding, margin required, amount of interest, breakeven.
This is where Bajaj Broking comes into the picture as traders would want to check the margin money and funding costs before placing an eligible MTF order. Its platform also provides post-execution monitoring of MTF positions, margin utilisation and interest charges.
Critical Risk Checks
Margin money is only one part of planning a trade. The MTF also requires funding cost, price risk, margin requirements and the possibility of a margin call. And, due to leverage, losses can also affect the full position value.
Prior to using the facility, traders are advised to go through the broker’s terms, eligible securities, charges, pledge requirements and the current margin rules.
Conclusion
Margin money can bring structure to MTF planning by defining the contribution of a trader, the amount funded, holding cost and capital requirement. A quick calculation before entering a trade can also help with margin buffers and exit planning.
These numbers are easy to analyse with tools like an MTF calculator. The idea is to see the entire trade setup