The Charm Of Margin Funding In Retail Investors.

It’s been a week that Margin funding, in which ordinary investors buy stocks with approximately 25% margins and hold them for a year, reached a new high of 30,760 crores as the market reached new highs. This spike in risk-taking suggests that retail investors were enthusiastic, as the mid-cap and small-cap indexes just reached fresh highs. The average margin funding in June was around 28,535 crore, up from 26,600 crore in May and over 26,000 crore last year.

Many brokers provide margin trading facilities, often known as MTFs, in approximately 1,000 stocks. MTFs are financial products that let investors borrow funds from brokers to trade in the cash market. Brokers charge interest ranging from 9-18% depending on the client’s characteristics. 

What are the advantages of margin funding?

According to experts, the key reason for the increase in margin funding is the outperformance of broader markets, particularly in mid and small-cap equities. In general, retail investors are particularly active in mid and small-cap companies, and some swift momentum in these equities has attracted retail investors, who in turn employ margin funds to capitalise on short-term opportunities in these stocks. 

Over three months, the Nifty Midcap 100 and Smallcap 100 indexes have gained by 18% and 20%, respectively, compared to a 10% gain in the Nifty. The current shares of investors are pledged as security for the MTF. For example, if an investor has 10,000 shares in his demat account, he can open a position valued up to 40,000. Investors must, however, maintain a minimum margin requirement in their accounts in accordance with the broker’s rules.

The MTF facility allows investors to construct a leveraged position in securities that is a multiple of what they can afford based on cash on hand. This is especially important in the non-derivative market, where future leverage is not an option.

There is no conventional limit to the number of days a position can be leveraged; this is at the discretion of the broker and is also customised based on the broker-client relationship. Clients that pay a higher brokerage and have a long-standing connection are often given preferential treatment. In most situations, this would last for 2-3 months.

Why is this notion of margin funding taking the stock market on buzz?

According to Vijay Chandok, CEO of ICICI Securities, there is increased investor interest in using MTFs because the MTF journey is now fully digital and seamless, the ability to use stocks as collateral (as opposed to cash), attractive rates of interest, research-backed calls, and platforms offering several risk containment tools that make the process very user friendly.

Indian equities markets saw a nearly 20-month time correction before breaking out of the consolidation zone around 16,000-18,000 Nifty levels on a consistent basis. As the valuation gap between large-cap and mid or small-cap has increased, it has offered the ideal foundation for new activity in broader markets.

Broader markets have been in a corrective phase for one and a half years, valuations have grown appealing in particular pockets of equities, while three months of solid foreign flows have bolstered general views among individual investors. Foreign investors have invested approximately Rs.1.29 lakh crore in Indian shares since March 1.

The market’s significant upward trend in May and June, compared to the dullness experienced in April, has enhanced customer interest, says Satish Menon, executive director of Geojit Financial Services. The number of daily traded clients has increased, as has the amount of margin funded.

Conclusion.

Margin trading is advantageous to investors who want to profit from short-term market price swings but do not have enough funds to invest. It investors to purchase large quantities of shares with lesser sums. This increases their power. Leverage puts them in a position where they can profit from minor market fluctuations.