What distinguishes loans against shares from margin trade funding?
Margin Trade Funding
Margin Trade Funding is a flexible option available for investors who prefer to use the shares available in their Demat account as securities. It lets them trade more than they own and make more money if prices go up the way they expect them to. Margin trade funding also helps investors leverage their position in the market either in terms of cash or security. This is predominantly marked by the broker and helps an investor make the desired profits with earnings in excess.
Most brokers offer margin trade funding as a service based on a list of securities that have already been approved, with a haircut for a margin that has already been set.
The amount of money you can buy with a margin account changes every day and depends on how the prices of the securities change. Investors can get money to buy more securities by pledging their long-term investments as collateral in the case of Margin Trade Funding.
Loan against Shares
Loan against shares or securities lets investors borrow money against their shares that are listed.
The loan has an interest rate that one must pay each month based on how much they take out of the loan account and for how long the money is used. Though there are some additional costs for the customers in the form of interest, the boon is about the quick disbursal of loans against shares by Abhiloans, wherein the customers can still retain their long-term investments as collateral.
More things about these two services are the same than different. You can figure out what these services are like by how they are used, how they work, and what the terms and conditions are. As in the case of loans against shares, investors must put up their shares as collateral and receive funds in their bank account, which can be used for any significant use.
One must open a margin fund account and pay an initial margin to use margin trade funding. A loan in the form of a loan against shares cannot be used to buy stocks, but a margin trade fund can be used to buy stocks and keep trading.
More about Margin Trade Funding:
When an investor doesn’t have enough money to buy shares, a person calls the broker and asks for the difference. The broker puts the money into the trader’s margin account right away to finish the deal.
For investors to use this service, they must either pay a portion of the total purchase price or put-up approved securities as a margin for loan against securities. The rest of the value of the purchase is being paid for by NBFC.
In margin trade funds, an investor must take care of three important steps:
- Ensure the minimum margin availability during the trading session
- Squaring up of position at the end of every trading session
- Ensure any carry-on positions of bought shares into a delivery order after trading
More about Loan against Shares:
Abhiloans and other NBFCs offer a way for an investor to borrow money against their dematerialized shares. A loan can’t be taken out against all an investor’s shares because banks usually have rules about which shares can be used to cover the loan amount.
This criterion has a list of the approved securities to which they will lend money. For equity shares, the amount of the loan is based on a percentage of the share’s value, which can be anywhere from 50% to 70%.
The key advantage of choosing a loan against shares by an investor can be potentially lower interest rates than other non-collateral loans like personal loans etc. Depending on the context of investment required, one can choose margin trade funding or a loan against stocks.