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In this article, we will discuss

• A Brief Overview of the Margin Trading Facility
• How Does the Margin Trading Facility Work? 
• Benefits of Margin Trading Facility 
• Risks Associated with Margin Trading Facility 
• How to Enhance Trading Potential with MTF? 
• Get the Highest Leverage with Samco’s Mobile Trading Platform 
• Conclusion
• FAQ's

It’s not a good idea to pass off a lucrative trading opportunity due to a lack of funds. Margin Trading Facility (MTF) is the feature which can come to traders' rescue in such situations. It's quite a powerful feature which enables people to make optimum use of their trading potential. By taking a larger position in the stock market than their financial capacity, traders open up the window of opportunity for exponential profits. In this article, we’ll focus on the important details related to Margin Trading Facility. Read on to know about its working, benefits, risks and other details.

A Brief Overview of the Margin Trading Facility  

MTF is described as a financial tool which enables traders to borrow money from brokers to trade in the cash market. It's an effective strategy which helps stock market participants to take larger positions than they can normally afford to take using their funds. The key feature which makes margin trading possible is leverage. It’s the ratio of borrowed funds to the trader’s capital. A 4X leverage can help people trade with four times the amount of capital they have in their account.To purchase securities or derivatives using borrowed money, traders need to pay a fraction of the total transaction value. The amount they pay initially is referred to as the 'initial margin.' Thus, this facility gets the name ‘Margin Trading Facility’.Notably, interest is charged on the borrowed amount regularly and traders need to repay their loans. Traders can pay this margin amount to brokers either in cash or use shares as collateral. Some brokers even allow traders to pay a combination of stocks and cash for paying margins. 

How Does the Margin Trading Facility Work? 

If someone wishes to engage in margin trading, they must first have a margin trading account. Brokers disburse funds to MTF accounts to enable people to trade marginally. It should be noted that an MTF account is different from a Demat account. The market watchdog Securities and Exchange Board of India (SEBI) has provided a list of securities that are allowed to be traded under MTF. The minimum margin a trader deposits with the broker determines the amount they can borrow from their margin account. The margin amount can also be determined by the assets a trader invests in with his/her borrowed money. Different brokerage firms have different requirements for the margin value as well. Let’s use an example to understand this better:Suppose a person wishes to purchase shares worth ₹80,000. But he only owns ₹50,000 worth of shares. The trader can purchase the additional shares by paying a percentage of the total amount. Let’s say that the authorised broker has set a percentage of 20% as the margin requirement. The trader has to pay 20% of ₹80,000 i.e. ₹16,000 as margin amount to get 4X leverage. His broker will provide the remaining amount of ₹64,000. 5% interest will be charged on the loan amount. If the price of the stock increases by 10%, the total value of his investment will increase to ₹88,000. He can choose to pay off his interest (₹3200) and loan (₹64,000) at this point. If he does that, he will have made ₹4800 in profits using the Margin Trading Facility. Alternatively, he can use his increased margin value to buy more shares. This means that with 4X leverage, he can get ₹19,200 from his brokerage to increase his position. However, if the value of shares falls, it will amplify his losses in a similar manner.

Benefits of Margin Trading Facility 

Check out the benefits of margin trading:

• Increased Exposure to Market Opportunities 

MTF provides more exposure to market opportunities because it provides them with additional funds to benefit from trading positions. When trades are successful, it can lead to exponentially higher returns.

• Safe and Secure Credit Facility

Only SEBI-registered brokers who are well-scrutinised by stock exchanges are allowed to offer the Margin Trading Facility. As a result, it is a safe and secure way to borrow credit to finance the purchase of securities.Interest rates for MTF are much lower than unsecured loans because traders pledge their securities or cash as collateral. This is the reason financial experts consider it to be a sustainable credit option compared to a personal loan. 

• Flexibility to Leverage Market Changes 

MTF makes sure traders have the required flexibility to adjust their positions swiftly with respect to market fluctuations. With this facility, people can use all available options to capitalise on lucrative market opportunities. They maximise their potential gains using the benefit of leverage.

• Improves Purchasing Power 

An important feature of a Margin Trading Facility is that it allows traders to increase their purchasing power by making use of the securities lying in their demat account. If they take a margin against cash, they can improve their returns on invested capital. 

• Helps to Capitalise on Short-term Movements 

Through MTF, traders can effectively make use of short-term price movements. Traders use a margin to purchase a large volume of stocks with a small margin which increases their leverage greatly. It's an effective way to earn profits from short-term and sudden price fluctuations. 

Risks Associated with Margin Trading Facility 

It would be unwise for any trader to disregard the risks associated with margin trading. Here are the notable risks traders should be aware of:

• Enhanced Potential Losses 

Profits from trades executed by MTF must be high enough to cover the expenses. While MTF can be an effective way to earn high profits, it can enhance one's potential losses as well. Due to the increase in exposure, a small downward movement can cause considerable losses to the trader. Moreover, regardless of your asset's performance, you will have to pay interest on the borrowed amount.

• Asset Liquidation 

Brokers will take action if individuals fail to abide by the terms and conditions of the margin trading facility. When the value of collateral falls below a certain level, the broker will issue a margin call asking for an increase in the margin amount. But what if you fail to fulfil the margin call? In such a situation, your broker has the authority to liquidate your assets and recover the sum.

• Need to Maintain a Minimum Balance 

Stock market participants have to maintain a minimum balance in their margin accounts to avail an MTF. In case they fail to do so, brokers will sell off some of their assets/securities to make sure the minimum balance is there in the account.

• Approval for Only a Few Securities 

Traders need to note that they can’t use MTF to purchase all kinds of stocks. Brokers can offer MTF only for a SEBI-specified list of securities. There have been instances when brokerage firms had to remove the facility from stocks removed by the market regulator.

How to Enhance Trading Potential with MTF? 

Traders have to be careful and manage the risks associated to enhance their trading potential with MTF. Here are some useful tips for margin trading:

• Have a Clear Understanding of the Leverage Ratio 

The amount you can borrow depends on the leverage ratio. In fact, the optimal leverage ratio is an important factor with respect to the margin trading facility. While a high leverage ratio can always improve gains, it can also increase your risk exposure which can, in turn, lead to losses.A low leverage ratio reduces risk exposure but also limits the possibility to earn high profits. Ideally, traders should strike a balance between risk and reward. To do this, they need to find out the optimal leverage ratio which suits their trading/investment strategy and risk appetite. It is always a good idea to keep track of your risk exposure, leverage ratio and margin requirements. 

• Avoid Margin Calls 

If your account’s margin balance falls below the margin maintenance level, it’ll lead to margin calls. The minimum amount of equity needed to ensure a margin position is open is referred to as the margin maintenance level. When the level drops, brokers will issue a margin call, asking the trader to restore the margin balance. If you fail to meet a margin call, brokers can liquidate your trading position which can lead to significant losses. Maintaining the margin account balance and monitoring it regularly is essential to avoid margin calls. 

• Make Use of Stop-Loss Orders 

To mitigate the risk of sudden market downturns affecting your leveraged position, you can use a stop-loss. Using this feature, you can automatically sell off your shares once their prices fall below the pre-set level. It can prevent losses and ensure that your overall investments remain safe and profitable. 

Get the Highest Leverage with Samco’s Mobile Trading Platform 

Get up to 4X margin for equity delivery with Samco’s trading app. The brokerage charges are as low as ₹20 for every executed order. We offer a maximum of 100X leverage for futures, 20X leverage for options and 33X leverage for intraday trading.Apart from a convenient trading facility, you'll also get timely notifications and alerts. You can ‘Ace the Index’ with Samco’s trading app. Its exclusive features include the following: 

• MTF: Zero Balance Trading

Get the MTF facility against your shares for every positional and intraday trade.

• 4X Leverage on 500+ Stocks 

Improve equity delivery buying leverage.

• Fund Manager Comparison 

Check your stock market performance against top mutual fund managers and keep improving your trading skills.

• Futures OI Build-Up 

Get access to real-time Open Interest build-up heat maps for futures.

• Lowest Margins for Future Trading 

Pay the exchange margin requirement only. 

• Advanced Watchlist 

Get access to trading opportunities with various market movers. 

• Personal Index 

Build and track your personal index. Improve your returns and beat the market index. 

Conclusion

To sum up, the Marginal Trading Facility (MTF) helps traders leverage attractive trading opportunities even in the absence of the required funds. But they need to keep in mind certain important points before engaging in margin trading. Ideally, they should consider borrowing for short durations because the longer the duration, the higher will be the interest payable. Increasing margin utilisation at a sustained pace and using a stop-loss order will help to minimise potential losses. If the market crashes, margin traders can incur huge irrecoverable debts. Having a backup fund in such situations is most important because market movements are unpredictable.

FAQ's 

• Who can avail the Margin Trading Facility? 

Clients of SEBI-registered brokers who're active in trading at NSE and BSE can avail Margin Trading Facility. It should be noted that NRI clients are not eligible for MTF. 

• How long can a person hold the stocks purchased via MTF? 

A person can hold the stocks bought via MTF as long they maintain the necessary margin in their margin trading account. 

• Can I use MTF for trading in F&O, commodities or currencies? 

Yes, but it depends on the policies of the stockbroker offering MTF. For instance, Samco allows margin trading on equity delivery, equity intraday, futures and options trading.

• What is MTF pledging? Is it compulsory? 

Suppose a person has bought shares via MTF. Then, they’ll have to pledge the shares within a particular deadline to keep holding their position. As per SEBI’s mandate, it is compulsory to pledge the shares bought with MTF. 

• Who should avoid the margin trading facility?

If you are an inexperienced investor, you may want to avoid margin trading as it can result in significant losses. However, if you understand the risks of this facility and have a strategy to deal with it, margin trading is a useful tool for getting market-beating returns.