To trade in the financial markets you need funds, and when you keep trading with your broker and gain the credibility of using your trading account fairly without violating any rules and regulations. Then you can unlock various features or privileges to access trading with high trades with fewer funds.
Yes, trading with sufficient funds in the market is not a big deal, but if you don’t have sufficient funds available right now and are looking to trade in a profitable but high-value trade position, then what will you do? Here you can use the margin trading facility (MTF).
MTF is a kind of trading facility to trade in the value of shares higher than the funds available in your account. Today we are going to discuss about MTF, how it works, its rules and regulations and various other factors like its pros and cons with risk factors of using this facility.
What is a Margin Trading Facility in the Stock Market?
Margin trading facility (MTF) in India is a buy now and pays later facility offered by the brokers to their clients with a certain deposit of money. You can get funds to trade up to five times the funds you currently have in your account and when you close your position you can return money with interest. This leveraging facility is available for intraday trading, non-positional trading or future &options.
While in the position or delivery-based trading you need to deposit at least 20% of funds in your trading account to enter into the trade position. And you can deposit the remaining account before the time of settlement. However, you can also get high ratio MTF by pledging your shares.
How Margin Trading Works?
If you already have a trading and demat account with your broker, and your broker is offering the MTF service, you can ask to activate this feature in your existing account. You can also ask to open a margin trading account to avail this facility to trade in the eligible underlying securities.
Once you have access to a margin trading account you can choose your underlying security and enter into higher-value trades by depositing a few portions as margin money. The fund your broker offers under MTF is considered a loan which is chargeable as per the interest rates policy.
Margin Trading Example
Suppose you want to trade in any trade worth Rs 10,0000but have only Rs 25,000, then how would you arrange the remaining funds? Here you can use the MTF with 4x leveraging offered by your broker. The remaining Rs 75,000 will be funded by your broker, which you can pay later with interest.
Here you get 25% MTF and need to deposit just Rs 25,000 and the remaining Rs 75,000 will be available to you from your broker side. This is called the MTF and times of margin offered and rate of interest on such funds are fully dependent on your broker with different terms and conditions.
Also Read: How to Choose the Best Discount Broker in India: Points to Consider
Rules and Regulations for MTF
Security Exchange Board of India (SEBI) is the regulatory body in India to regulate the rules and regulations in the stock market related various activities and compliance-related norms. Similarly, MTF-related rules and regulations are governed by the SEBI with various guidelines released to trade with margin in various segments of the market. Here below, rules of margin trading with MTF.
Eligible Entities: As per the SEBI only the registered brokers are allowed to offer the margin trading facility to their clients. And further brokers are instructed to allow MTF only to their eligible clients, who can use this pay-later facility without misuse and violating any norms.
Margin Limits: On the other hand, brokers are allowed to give leverage under MTF up to certain limits prescribed by the SEBI. As per the latest rules and conditions, any broker is not should not allow a margin of more than 5x to trade in any underlying security.
Margin Calls: The traders using the MTF need to maintain sufficient margins through the day as per the highest margin for intraday trade positions. Brokers also always need to remind their clients through margin calls to maintain the minimum margins.
Stock Selection: All the stocks and underlying securities are not allowed to trade with MTF. As per the SEBI rules, and based on the volatility and volume of trades, only a few selected stocks are allowed for MTF. Hence, traders looking to trade with margin trading need to choose the stocks allowed for MTF.
Benefits of MTF Trading
Traders who know the advantages of MTF trading use this facility offered by their broker. It is not only providing the opportunity to enhance the returns on their investment by leveraging their funds. So, if you want to use the MTF in your trading strategy you need to know its benefits.
Also Read: Top 10 Different Types of Trading Strategies in Stock Market
Enhanced Purchasing Power: When you get the facility to trade in the high value of trades with fewer funds, your purchasing power is enhanced to trade in the high value of trade. You can buy the securities beyond your capability with the facility to arrange the funds later at the time of settlement.
High-Value Trades: Some of the stocks with high prices or valuations are difficult to buy for small traders. Here if you see any upside potential in such stocks, you can use the MTF to enter into high-value trades. This benefit allows traders to get the opportunity to trade in various high-price stocks.
Leveraging of Funds: If you have the funds not sufficient to enter into a trade position, you can use the MTF to leverage the buying power of your existing funds many times. The leveraging of funds not only increases the profitability of your investments but also minimizes the cost of funds.
High Return in Investments: Entering into high-value trades is possible with MTF, and your trade position ends in a profit, then the actual return on your investment would be on your own funds and interest charges after returning the borrowed money under MTF. When you calculate your return on your funds, it would be much higher translates your investments into a high ROI.
Trading Flexibility: You can use the MTF for Intraday or other underlying securities in the F&O segment with the advantage of flexibility to enter into both types of trade positions – long and short selling. However, you need to close your trade position same day for intraday trading and before the contract expiry in F&O.
Use of Existing Share Holdings: If you have a portfolio of shareholding of various companies, you can pledge them to take the high ratio of margins under the MTF. You can use these holdings as collateral security for the brokers to provide you with the margins to trade in other high-value trades.
Risk Factors of Using the MTF
There is no doubt that MTF provides an opportunity for traders to leverage their trading capabilities. While on the other hand, there are various disadvantages of using the MTF. Before you utilize this feature you need to know the various risk factors involved with margin trading.
Minimum Margins: To enter into any trade position you need to maintain the minimum margins, otherwise your transaction will not be executed. And till your trade position is open you need to maintain the minimum margins on daily basis or based on your trade and type of underlying security.
Face the Margin Calls: To maintain the minimum margin or other types of necessary margins you will get margin calls from your broker. If the market is volatile or your underlying security is moving against your expectations, it could be irritating to get such frequent calls and maintain the margins.
Also Read: How to Trade in High Volatile Market: Best Trading Strategies
Cost of Borrowing: The funds offered by your broker under MTF are like a loan that you need to return along with certain interest charges. The rate of interest depends on the broker-to-broker and the duration of using the funds for trading. And if you hold your trade position for longer days, your cost of borrowing also increases.
Risk of Overleveraging: Using the MTF you can leverage your investments beyond your financial capabilities which can cost you in terms of losses or high cost of borrowings. The fund you get for margin trading is a loan for a specified time limit, and you need to return the same at any cost or face margin penalties.
Forced Liquidation: During trading hours or when your trade position is open, as per the movement in the price of the underlying security you need to maintain the minimum margins. If you fail to do so, your broker has the right to liquidate your trade positions or it will be squared off either it is in profit or loss.
Risk for Pledges Shares: Some traders utilize the MTF for high leveraging if you have pledged your shares as collateral security. Here you also need to maintain the minimum margins, and if you are unable to maintain the same, your broker has the right to sell your shares in the market and recover the funds offered to you.
Margin Penalties: Apart from all the major risks, not maintaining the various types of margins under the MTF you can face the penalties imposed by the exchange or regulatory authorities. There are certain rules and regulations with penalty charges for margin trading as per the compliance that you need to follow.
Also Read: What is F&O Margin Penalty: SEBI Rules & How to Avoid it
Summing-up
MTF is a kind of leveraging facility to take advantage of “use now and pay later” facility offered by the brokers to their clients. You can deposit a certain amount in your trading or margin account and trade up to 5 times the funds you have in your trading account. It will boost your purchasing power with the opportunity to increase your return on investments with the flexibility to trade into multiple types of trades.
Also Read: How to Keep Your Trading Account Safe from Unauthorized Use
While, on the other hand, margin trading can be risky as you need to maintain the minimum margins on a daily basis and failing to do so, will liquidate your trade positions or face the margin penalty. You also need to pay a certain amount of interest to use the funds for margin trading.
There are various other limitations only MTF is available for selected underlying securities and only a limited amount of margin depending on the liquidity and volatility of the underlying security etc. Hence, use the MTF wisely and only when you can afford it for short-term trading.
