Margin money is one of the most exciting concepts in investing. It offers higher returns but comes with increased risks. Therefore, understanding how margin money works and for whom, is very critical for any investing enthusiast. Let us delve into the working of margin money, especially through the prism of the Margin Trading Facility, and find out who is going to benefit the most from this investing approach.
What is Margin Money?
Margin money is essentially the amount of funds an investor has to deposit with a licensed money lender Singapore for purchasing securities on margin. It simply works as security, which covers that loan made by the broker to the investor to buy more stocks than he is able to with his own cash. It is broadly applied in margin trading and forms the very basic concept under the MTF.
How Does Margin Money Work?
Initial Margin and Maintenance Margin
Now, when you decide to engage in margin trading through an MTF, there are two most important components that have to be understood:
1. Initial Margin
This is the percentage of the total purchase price you must pay for on your own money. For example, if you want to buy shares of 1 lakh INR and your broker insists on an initial margin requirement of 50 percent, you will have to deposit 50,000 INR the broker lending you the remaining 50,000 INR.
2. Maintenance Margin
This means the minimum equity a person should have in his margin account. When the value of your holdings falls below that level, you will receive a margin call to deposit more money or sell some of these securities—all to bring back the amount of your account to that position specified by your broker.
Margin Calls
A margin call is triggered when the value of your securities falls below the level of the maintenance margin. Your broker will demand that you deposit more funds to cover the shortfall. If you cannot meet the margin call, the broker has the right to sell your securities to cover the foreigner loan Singapore.
Benefits of Using Margin Money
1. Increased Buying Power
Using margin money thus enhances purchasing power in securities over what could have been purchased by just using one’s own cash. Therefore, if the market goes your way, you might get higher returns.
2. Leverage
One major advantage is that margin trading will leverage you into controlling a greater amount of assets with less of your own money, so this may translate into big gains from small price movements in securities you own.
Risks of Using Margin Money
1. Losses Multiplied
Just like margin trading can maximize gains, so too it can multiply losses. If the value of your securities drops, it could mean losing more than the initial investment, proving margin trading to be of high risk.
2. Interest Costs
Access to borrowed money is not free. The interest on the borrowed money through a margin payday loan Singapore can add up, especially if one holds positions for a longer period. All these costs need to be factored into your overall investment strategy.
Who Should Use Margin Money?
1. Experienced Investors
Margin trading on an MTF is more suited to experienced investors. They already know the risks and have a pretty solid strategy in place. Such investors are generally conversant with market dynamics and are able to handle the pressure associated with margin calls.
2. Risk-Tolerant Investors
Margin trading will involve investors who can take higher levels of risk. If you can swallow the fact that there is a possibility that you will incur large losses in pursuit of higher returns, then margin money might be something for you.
3, Short-Term Traders
In this case, this margin money benefits the short-term trader who frequently buys and sells. Such traders often benefit from small price movements and hence can expect better returns using borrowed funds.
Conclusion
Margin money availed through a margin trading facility may be a very effective tool to maximize your investment potential. Still, it certainly comes with high risks, including increased losses and interest costs. So it is of extreme importance that one should understand the dynamics of how margin money works and take a very cautious call as to whether this product fits into your aims of investment and risk tolerance.
Recommended: Get a legal loan Singapore from a licensed money lender Singapore.
