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Introduction: The MTF or Margin Trading Facility allows an investor to take a higher value position by investing only a small fraction of the total transaction value of a security or asset. This fraction is known as a margin and it can be in the form of either cash or shares as collateral. The broker pays the remainder of the total transactional value of the security or asset. With the help of the margin trading facility, an investor or trader increases their buying capacity, providing them with a leveraged position in the market. Since the MTF acts as a loan, the broker charges the investor a nominal interest fee.
The Margin Investors Get in MTF
In the margin trading facility, investors usually pay 20% of the total stock value as their initial investment. This percentage can however increase depending on the stock.
Here’s an example to demonstrate the margin trading process better.
If an investor wants to invest in stocks worth र2,50,000 through MTF, they would need at least र50,000 as the initial investment and the rest र2,00,000 will be paid by the broker. As the broker is investing in the shares to help the investor, the latter is charged a nominal per day interest by the former. This is how an investor can own shares with the help of the margin trading facility.
Investors need to remember that the stocks they want to invest in are verified i.e. pledged with the broker as per SEBI guidelines.
Benefits of Margin Trading Facility
Listed below are some of the benefits or advantages of using the margin trading facility:
● Higher Returns:
With the help of the margin trading facility, investors can gain major growth and see improvement in the percentage return on the capital invested, with minimum investment.
● Short-term gains:
MTF is a great tool to help investors keen on investing for short-term gains.
● Better buying power:
Since investors mostly have to invest only 20% of the total share value to own it, they open themselves up to a position 5x their initial contribution.
● Stock Leveraging:
As MTF can be availed against both cash and securities, investors can utilize stocks in their demat accounts as collateral.
● Invest in Bigger Trades:
For larger trades that require more than the available funds, the Margin Trading Facility provides up to 4x leverage to the investor. This limit does depend on the stock/asset type and its trade value.
● Diversify Portfolio:
The Margin Trading Facility helps investors diversify their portfolio with any excess funds, thus mitigating potential risks.
● Safe:
MTF is a safe and secure provision for investors as it is monitored by SEBI and the board is constantly amending its rules and regulations to help investors.
Risks of Margin Trading
Below are some of the risks that margin trading can pose:
● Maintaining Minimum Balance:
Investors who avail of the MTF need to maintain a minimum balance in their trading account in case the stock goes into a loss or the margin requirement increases.
● Higher Chances of Losses:
There is no doubt that MTF can increase profits. However, in case the stock prices fall, losses could be greater than an investor’s initial investment.
● Liquidation:
If the value of an investor’s investment drops and there is a margin requirement, the broker can square off the investor’s position if the latter does not add the required funds on time.
Do’s and Don’t of Margin Trading
When participating in margin trading, it is important to keep a few pointers in mind. Below is a list.
Do’s
● Set a clear strategy when investing
● Investment in different securities if possible to help diversify your portfolio
● Do your research and understand all the risks associated with MTF
● Stay on top of market trends to know which way the wind is blowing
● Risk management is an important aspect of MTF. Remember to not ignore the practice.
Don’t’s
● Do not overleverage
● Remember to never ignore or overlook fees or charges
● Never ignore margin calls in MTF
● Do not invest depending on any kind of speculation.
● There is no use chasing losses in the share market.
Conclusion
The Margin Trading Facility makes for a great provision for investors looking to take a higher value position with a fraction of investment in an asset, where the broker pays the rest of the asset value. However, like every other provision, it is important to research every aspect of MTF before availing it. This will help investors minimize potential risks, helping them better their investment experiences.
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