Margin Requirement

Margin Requirement

The word “margin requirement” is probably not foreign to you if you’re an experienced trader. While the vast majority of traders use their own money, others take out loans specifically to trade. Margin trading is the practice of buying financial assets with borrowed money. Borrowed money is used to purchase stocks, which serve as security for the loan. The goal of taking out a loan to purchase stocks is to increase the amount of cash available for investment, which should lead to larger earnings. 

Under margin trading, an investor can buy more securities, sell them short, etc., by using the assets already in their portfolio as collateral. Setting up a margin trading account has several advantages, but investors should think carefully about it first. 

What is Margin Requirement? 

The current value of the collateral being loaned is less than the amount of the loan itself, and this difference is known as the margin requirement. In times of low demand or deflation, the central bank can encourage commercial banks to lend more money by lowering their margins. This boosts the money supply and helps close the deflationary gap. 

Understanding Margin Requirement 

The quantity of equity an investor possesses in their brokerage account is called margin. What we mean when we say “to buy on margin” is to acquire shares using borrowed funds from a broker. You’ll need a margin account instead of a regular brokerage account to do this. An investor can buy more securities using a margin account than they could with their existing account balance since the broker loans them the money. 

When you buy stocks on margin, you are essentially taking out a loan against the cash or assets you currently have in your account. Interest payments are due every month for the collateralised loan. Due to the investor’s use of borrowed funds would amplify the impact of both gains and losses. When the expected rate of return on the investment is more than the interest paid on the loan, margin investing might be a good choice. 

To illustrate, let’s say your margin requirement is 60% for your margin account. If you wish to buy $10,000 worth of stocks, you’d need to put $6,000 down as a margin and borrow the remaining $5,000 from your broker. 

Working of Margin Requirement 

To buy stocks on margin, one must borrow funds from a broker. Consider it a loan from your brokerage, if you will. With margin trading, you may purchase more shares of stock than you would otherwise be able to. 

An account that allows you to trade on margin is necessary. In a traditional bank account, you would trade with the funds available in the account. You can buy assets using a margin account loan and use the money you deposit as collateral. With this, you may borrow as much as half of an investment’s price. That means you may purchase assets worth up to $10,000 with a $5,000 deposit. 

The broker will take a cut of the interest you pay back on the loan you take out. You will be able to retain the remaining funds after paying off your loan with the sale of your stocks. 

Regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC), margin trading is subject to stringent requirements on minimum deposits, maximum borrowing amounts, and minimum account balances. 

Benefits of Margin Requirement 

The following are a few advantages of margin trading: 

  • Margins allow investors to profit from short-term price changes even if they don’t have enough cash on hand. 
  • Securities other than futures can be leveraged. 
  • Margin trading allows investors to increase their profits on investment. 
  • With this feature, investors may use the assets in their demat accounts or investment portfolios as security. 

Example of Margin Requirement 

For example, suppose you want to open a margin account and put $10,000 in it. You now have the purchasing power of $20,000, thanks to your 50% down payment. Then, you’ll have $15,000 to spend on stocks (at $5,000 a share). You have not used your margin and have sufficient cash on hand to pay for this transaction. If you want to invest in assets worth more than $10,000, you’ll have to start taking out loans. 

A margin account’s purchasing power fluctuates daily in response to price movements in the marginal assets held therein. 

Conclusion 

Any trading activity must have a margin requirement. This guarantees that traders will have the financial means to repay their brokers. On the other hand, they may use leverage to their advantage and make the most of any profitable agreements. Just keep in mind that leverage might increase your potential gains as well as your losses. 

The magnitude of the margin required could vary among countries and exchanges. Find out what the platform’s rules are before you start making trades. In any other case, your money might be lost, or your account could be frozen. 

Frequently Asked Questions

Margin trading is when a trader puts more money on the line than they can afford to earn a higher return potentially. The opportunity to buy equities at a price that is just below their intrinsic worth is available to investors here. Investors can buy stocks through these trading activities because brokers lend them the money. Investors might settle the margin when they rebalance their stock market positions. 

The margin trading capability is integrated into the current trading account and associated Demat account, rather than being a separate account. Customers of the MTF service can pledge their stock or cash as collateral for the margin amount. 

When it comes to the financial markets, margin trading is a powerful instrument that magnifies wins and losses. There are dangers involved, such as interest expenses, regulatory limits, and the possibility of increased losses, but there are also prospects for increased earnings. 

When you trade on margin, you borrow money from a brokerage so you may trade with more capital. Margin trading requires investors to put up cash as security for a loan and then make interest payments on top of that. 

A margin call is a request from a broker for an investor to contribute more funds or securities to their account to meet the minimum equity value required by the maintenance requirement. 

 

Related Terms

    Read the Latest Market Journal

    Predicting Trend Reversals with Candlestick Patterns for Beginners

    Published on Apr 24, 2024 45 

    Candlestick patterns are used to predict the future direction of price movements as they contain...

    Introduction to unit trust

    Published on Apr 23, 2024 35 

    In the diverse and complex world of investing, unit trusts stand out as a popular...

    Back in Business: The Return of IPOs & Top Traded Counters in March 2024

    Published on Apr 17, 2024 550 

    Start trading on POEMS! Open a free account here! At a glance: Major indices continue...

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 72 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 160 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 90 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 109 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 192 

    In a world where the click of a button can send goods across oceans and...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com