For numerous investors, limited funds can be a significant barrier to action in capturing lucrative market opportunities. But what if an investor could expand their buying power to venture into a larger position than their own capital allows? This is where a Margin Trading Facility MTF comes in. MTF is a strong, although very risky product that allows you to use your current capital to engage in buying Power by borrowing money from the broker to trade.
This blog will help you understand the Margin Trading Facility MTF well in the Indian Share Market, its full form, how it works, its advantages, and the massive risks you need to be aware of before going into this product.
What is Margin Trading Facility (MTF)?
The full form of MTF is Margin Trading Facility. MTF is a facility given to stockbrokers, where an investor can buy stocks by paying only a part of the total trade value. It allows you to finance the balance of the trade, as effectively, your broker will loan you that balance credit amount. The shares are purchased, and the broker will hold the shares as collateral until you close the position or pay them back the money you owe.
Let’s say, for example, that you want to purchase a car that costs Rs. 10 lakhs. You can pay Rs. 2 lakhs as your portion of the purchase price, while the other Rs. 8 lakhs is paid back to the bank. Similarly, under MTF, you pay a 'down payment' for the stock purchase, and the broker will finance the rest of your stock purchase amount. This trade financing is commonly called 'Buy Now, Pay Later' too.
How Does MTF in Stock Market Work?
MTF may seem complicated, but it's much easier to follow when you break down the most important parts of MTF using an easy example.
For example, you have Rs. 25,000 in your brokerage trading account and you would like to purchase 100 shares of a company priced at Rs. 1,000 a share. That gives a total trade value of Rs. 1,00,000. Your broker has MTF with a 25% margin.
Initial Margin: You pay 25% of the total trade value (Rs. 25,000). This is your 'initial margin.'
Broker Contribution: The broker will take care of the remaining 75% (Rs. 75,000).
Pledged Shares: The 100 shares you purchase will be placed in your Demat account and then pledged as collateral to the broker for the loan that they have financed.
Interest Charges: The broker will charge you a daily amount of interest on the funded amount to finance the 75% for as long as you remain in the position.
Let's explore what occurs when the stock price fluctuates.
Scenario 1: Stock Price Increases
In the event that the stock price increases to Rs. 1,100 per share, the market value of your 100 shares is Rs. 1,10,000. Therefore, you earn a total profit of Rs. 10,000 on your investment of Rs. 25,000 (100 shares x Rs. 100 profit per share). Without MTF, you could have only purchased 25 shares (€25,000 / Rs. 1,000 per share), which would only return Rs. 2,500 profit. This is one way to see how MTF makes your potential performance much greater.
Scenario 2: Stock Price Decreases
If the stock price falls to Rs. 900 per share, then your 100 shares' market value is Rs. 90,000, giving you a loss of Rs. 10,000 (100 shares x Rs. 100 loss). Your broker will send you a Margin Call, which means you must deposit more money to maintain the minimum margin. The broker may sell your shares to recover their loan if you do not deposit the funds. This often leads to large losses.
To discover more of the problems with leverage risks in trading, feel free to investigate our Risk Management Course, or the Trading Rules and Strategies for Stock Market.
Benefits of Using Margin Trading Facility
Margin Trading Facility (MTF) can benefit a thoughtful, strategic trader enormously. Here’s why:
Increased Buying Power - This is the most significant advantage of utilizing MTF. It allows you to take a much larger position and earn potentially more than you could with just your own capital.
Tapping into Short-Term Opportunities - If you spot a great trade but have your capital allocated to other investments, MTF allows you to take a position without having to sell your current portfolio.
Flexibility in Your Time Horizon - Unlike intraday trading, where you must realize your exposure by the end of the day, MTF allows you to hold your position over multiple days, weeks, or even months. You can choose to wait for your target price.
Opportunity for Higher Returns - As illustrated in the earlier example, even a small positive price movement in the leveraged position can lead to significant outcomes on your actual invested capital.
If you are curious about how the market moves and want to learn more about technical analysis, our blog on Top Technical Analysis Tools would be a great read.
You may also want to read our blog on Fundamental Analysis in Stock Market to take a more holistic view of selecting stocks.
Risks and Disadvantages of MTF in Share Market
Although there are many advantages to using MTF, the risks of trading stocks using MTF are alarming.
Increased Loss: This is the greatest risk. The only disadvantage to MTF is that it also increases your losses as well as your profits. If the shares move against you, you can lose more than your original investment.
Margin Call: When the value of your collateral shares falls below a certain threshold, your broker will issue a "margin call." This is a demand for you to deposit more money in your account in order to maintain the margin standard. If you do not do so, the broker can sell the shares without your agreement in order to pay back the loan.
Interest Rates: The interest on the amount borrowed can be considerable, depending on the amount and how long the position is held. Not only do the interest rates not add to your profits, but they also add to the loss or decrease your potential profit.
Market Movement: Sudden, dramatic market movement can quickly erode your margins and create a margin call, even if the long-run market movement is actually in your favor.
To minimize these risks and understand stock market trading psychology, learn the art of Emotion Controlling in Stock Market.
MTF vs. Other Trading Types
It's important to differentiate MTF from other common trading types like intraday and delivery trading.
| Feature | Margin Trading Facility (MTF) | Intraday Trading | Delivery Trading |
| Holding Period | Can be held for several days/weeks/months. | Must be closed on the same day. | Held for more than one day (long-term). |
| Capital Requirement | Requires only a fraction of the total value (margin). | Requires a small margin, often with higher leverage. | Requires 100% of the capital upfront. |
| Overnight Risk | High. Subject to market movements after trading hours. | None. Positions are squared off. | High. Subject to market movements after trading hours. |
| Loan/Interest | Yes, you are borrowing funds and paying interest. | Yes, a temporary margin is provided, but no interest is charged for the day. | No loan, no interest charges. |
If you want to know which trading style is best for you, please read our blogs on How to Start Trading in the Stock Market as a Student?
To learn more in-depth, check out our Stock Market Trading Courses.
Conclusion
Margin Trading Facility (MTF) is a powerful instrument for investors and traders who are seeking to enhance their market exposure and take advantage of price fluctuations. It is not, however, for the weak at heart or novice traders. The leverage that should serve to magnify your potential profits can also dramatically magnify losses.
Before utilizing MTF, be sure you have a solid understanding of the market, a solid risk management plan, and are able to handle the psychological implications of amplified gains/losses. Leverage risks can be a double-edged sword, so please be careful.
If you are a beginner, it is highly advised to get Stock Market Online Courses so you can build a strong base. If you have been thinking about MTF, perhaps our Advanced Technical Analysis Course would be a good way to investigate.
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