The margin trading facility or MTF is a tool that helps investors borrow funds from a stockbroker to buy securities that have a higher value than the investor’s current funds would allow.
As a trade-off, investors are to either leverage 20% of the share value with the stockbroker as cash or use their current securities as collateral.
As a result, investors can hold a higher position at a margin. The stockbroker charges a nominal interest rate annually on the borrowed funds from the investor.
MTF has many features that investors need to be aware of while offering many benefits to them. Let us explore both these aspects:
Top Features in Margin Trading
The margin trading facility in India has many features. Some of them are listed below:
1. Collateral
The margin trading facility will not be a leverage trading facility if there is no collateral involved. Thus it goes without saying that collateral is one of the main features of MTF. In MTF, investors can either leverage cash or the securities in their portfolio as collateral when they decide to borrow funds from a stockbroker to invest in securities.
2. An MTF account
Apart from the demat and trading account, investors also need to open an MTF or margin trading account with the stockbroker. Any securities that investors plan on buying using the margin amount will be done through this account. The operations of the MTF account are monitored and pre-defined by the Securities and Exchange Board of India or SEBI as well as the stock exchanges in India.
3. Margin increase
At times when the stock market is bullish and climbing, the stock prices gain appreciation. As a result, the margin that an investor has put up from the stock they invested in also appreciates. Because of this appreciation, investors can even buy more securities on margin.
4. Carry forward
Margin trading enables investors to carry forward the stocks they bought on margin up to T (the trading day) +N (the number of days investors can carry forward the stocks). Here, N is determined by the stockbroker and an investor has the MTF account.
Authorised brokers: MTF is a secure facility to use as only brokers who have been authorised by SEBI are allowed to provide the facility to investors.
Benefits
Apart from the important features of MTF that investors or traders need to keep in mind, there are quite a few benefits that the margin trading facility boasts of. Some of them are listed below.
1. Increased Buying Power:
The margin trading facility empowers investors to invest in securities that are of higher value than their funds alone will not let them. As a result, investors automatically increase their buying power.
2. A Diverse Portfolio:
When the buying power of an investor increases, they can look at investing in a variety of securities that lets them diversify their portfolio.
Because an investor decides to spread their funds across a variety of securities, the potential risks also spread out increasing the potential for higher returns.
Investors can choose different securities based on themes and sectors, helping them steer clear of being dependent on the performance of one asset alone.
3. Short-Term Profits
MTF is an ideal way to make high returns from the market fluctuations on high-value stocks by investing a minimum amount.
4. Capital Efficiency
As MTF is dependent on borrowed funds, investors can utilize any leftover capital for other investment opportunities. Because there is no need for upfront payments in MTF. the world of multiple investment opportunities awaits investors.
Conclusion
Margin trading or MTF is a great provision that helps investors buy securities at a margin by borrowing from a stockbroker. With this borrowed fund, investors can then purchase high-value securities that they alone, with their funds, would not have been able to do.
This helps increase their buying power and elevates their position. However, before jumping the gun and availing MTF, it is important to understand all the features of the facility and the advantages it provides the investors. This will help traders or investors make the right choice for themselves.
