To invest in stocks and make money work for you, you require enough moolah to leverage the opportunities offered by the markets. Be it individual investors or Non Banking Financial Companies (NBFCs), all have to raise funds in order to meet cash flow needs. So, individual investors and stockbrokers choose margin funding to raise funds when they fall short of money while trading. On the other hand, NBFCs need funding to have robust capital to ensure smooth business function. Let’s understand the difference between the two.
Margin Funding
When you invest in stocks in a short period of time by arranging for more money than you have, to reap the benefits from the stock market when it is up is called margin funding. For instance, you want to buy XYZ stocks for Rs. 10,000 and you only have 5,000 but at the same time, this is a golden opportunity to earn from the upward going market. So, you arrange money by borrowing money from your stockbroker to buy stocks that will help you earn high returns. So this Rs. 5000 that you borrowed is called margin money.
How does it work?
Basic requirements
Follow the 50% self-finance rule in margin funding. For instance, you pick a stock of ABC company for Rs. 40,000, so you pay 20,000 and take the remaining 50% i.e. Rs. 20,000 from your stockbroker. Did you know that you can use your existing stocks from your Demat account as collateral against the margin money that you borrow from your stockbroker? This acts as a security against the borrowed funds.
What are the fees?
Since your broker is providing you with funds to meet your financial shortfalls you will be charged interest. The interest will be anywhere between 15%-18. This is where your rapport with your broker and the earning potential of stocks will come into play. Expect these rates to increase or decrease beyond the normal range depending on the market conditions.
NBFC funding
Unlike banks, NBFCs do not depend on Current Account Savings Account (CASA) deposits to raise capital. According to the RBI, this facility is only for banks and not for NBFCs. So, how can NBFC arrange the working capital or cash flows to run their business operations efficiently? Here’s how:
Bank Finance
As per RBI, NBFCs can fulfill their working capital needs and also cover the term loans by arranging the funds from any bank that is registered with RBI.
Long term: Bonds
Bonds are the one of most preferred ways for NBFCs to raise funds. This is because bonds allow reducing the interest rates on the source of funds. Tax-free bonds are popular and are often chosen for important sectors like roads and infrastructure. Bonds are usually offered to retail clients which prove to be beneficial for NBFCs. NBFCs can also choose private equity and venture capital as a source to raise funds too.
So, these are some fundamental differences between margin funding and NBFC funding. If you have any query, please connect with us on our contact number.
