Margin Funding

Liquidity is as important as Capital for short term trades

Experts believe that we are all set to enter the next phase of accelerated growth. While this promises good returns on investments in the medium and long term, there will also be increased opportunities for short term profit booking.

Short term opportunities generally appear without notice and even veterans are often surprised. In such instances, ‘cash in hand’ or liquidity becomes an essential supplement to capital. Margin Funding(MTF) and Liquidity Against Shares(LAS) are schemes intended to provide our patrons with instant liquidity or ‘cash on demand’ at affordable rates. MTF and LAS are different from the traditional “loans” from Banks. No Bank can give a “loan” to buy shares. Banks may be reluctant to extend retail loans for short durations of 1 to 15 days for trading. Even if they did agree, the process could take time and the trading opportunity would meanwhile be lost.

MTF and LAS gives short term traders an opportunity to ask for funds as and when required without any obligation to borrow, or stay borrowed, for longer than is absolutely essential. This is similar to an Option which confers on the buyer, in return for a small premium, a right to exercise the Option without any obligation to exercise it.

On the one hand, a trader may double his short term profits using funds borrowed under MTF or LAS. On the other, he may suffer a loss of capital due to an inability to pay-in on the due date owing to a lack  of liquidity  on that date. The interest cost of say 0.05 % per day would be only a small fraction of the Capital Gain or Capital Loss. Interest is payable only for the actual days that the funds are used. In the stock market, clients either Gain Capital or Lose Capital. Interest cost is nominal.

Liquidity or Cash in Hand (or a reliable source of instant funds) is vital for the short term trader to take advantage of trading opportunities and to tide over unexpected reverses.

An investor can invest to the extent of the risk that he can and is willing to undertake. However, he should remember to keep a certain amount of liquid funds as backup, or he could register for MTF/LAS as a dependable source of short term funds and avail the same only if required.

It is very important to note that you should leverage only for the very short term. Enter with a clear time span and a stop-loss in mind. Book Profits at every opportunity, even intraday if you can (no interest would be required to be paid) using MTF as a backup. Every trading decision cannot be right. In case of reverses, remember to exit at the earliest even if it means booking losses, at least on the borrowed funds.

Remember that LIQUIDITY is as important as CAPITAL for short term trades.