Benefits of Margin Financing
Instant liquidity without selling long-term investments: Investors don’t have to sell their long term investments to en-cash their value. Investor can use shares currently held in the portfolio to take larger positions in the market.
Increased Investment Capacity:Margin lending can be used as a simple and flexible option to leverage up/gear up investor’s portfolio, allowing them to increase their overall stock market investment with a relatively small amount of their own money.
Diversification:Having more money to invest means you can spread your portfolio across a variety of shares and securities. Diversification can reduce the investment risk of Investor’s portfolio and make the returns less volatile.
Dividend & Other corporate benefits: Investor not only retains the ownership but also continue to avail of the shareholder benefits such as dividends, bonuses, rights, etc.
Flexibility in utilization of limits:Investor can prepay since this facility is in the nature of a overdraft facility. No prepayment charges are charged. Interest is charged only for the days the loan amount is utilized.
Buying limits are set daily as per the unutilized drawing power and Investor can purchase shares upto the buying limit. The shares in the portfolio are revalued on a daily basis and drawing power is updated accordingly. Any appreciation in the value of the securities given as margin would automatically allow enhancement in drawing power.
Margin Financing is suitable for investors who
plan to invest in a portfolio of Approved Securities and who expect the net return on their investments to exceed the cost of borrowing over their planned investment horizon; - own an existing portfolio of Approved Securities and who would like to supplement or diversify their investments without selling their existing portfolio; or
Understanding and minimizing risk
While borrowing to invest more money in shares and securities may increase potential returns, the most common risks associated with margin finance is Margin Call (i.e. reduction in loan to security value ratios) which occurs as a result of market volatility and/or high gearing levels. Risks can be minimized if
- investment portfolio is diversified across number of sectors and across the large caps and midcaps to reduce the risk of fall in one particular sector.
- portfolio is evaluated and churned on regular basis by booking profits and keeping stop losses.
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