Traders typically need to analyse various factors and wait patiently for the perfect moment to make a profitable trade. However, what if a great trading opportunity arises, and they lack sufficient funds? The answer is no; they don’t have to let it pass. They can choose the Margin Trading Facility (MTF), which significantly boosts their purchasing power. In this article, let’s understand how Margin Trading Facility works in detail.

Understanding Margin Trading Facilities

Margin trading is a service provided by brokerage firms like Kotak Securities, enabling traders to buy securities even when they don’t have enough funds. With this, individuals can purchase assets using borrowed money, paying only a part of the total transaction value, known as the margin. Interest is charged on the borrowed amount. 

You can pay the margin to your broker either in cash or by offering shares as collateral, though there might be a deduction in value for the latter. Some brokers even allow a combination of stocks and cash. The broker provides the remaining transaction value as a loan, with interest applicable. You settle the entire amount when closing your position. According to SEBI guidelines, shares bought using the margin trading facility (MTF) must be pledged, and this process must be completed by 9:00 PM on the purchase date to avoid assets being squared off on T+6 days.

In addition, when considering opening a demat account, it’s crucial to be aware of the charges for a Demat account, especially if you plan to utilise the margin trading facility.

How Does the Margin Trading Facility Work?

Let’s use an example to see how margin trading works. Imagine you’ve found a great trading opportunity where you need to buy shares worth Rs.10 lakh, but you only have Rs. 1 lakh in your bank account. To make this trade happen, you decide to use the margin trading facility. Here, you can buy the shares by paying only a part of the transaction value, which is Rs. 1 lakh. Your broker covers the remaining Rs. 9 lakh. This means you’ve used 10 times leverage on your initial investment or the margin. Simply put, you’ve increased the size of your order from Rs. 1 lakh to Rs. 10 lakh, potentially multiplying your profits by ten times.

Advantages of Margin Trading Facility

The benefits of using MTF include:

1. Safe and Secure

The margin trading facility provides a secure method of borrowing credit for buying securities. Only SEBI-registered brokers, subject to stock exchange scrutiny, can offer this service. Since traders pledge their purchased stocks for MTF, its interest rates are usually lower than unsecured loans, making it a safer credit option compared to personal loans.

2. Long Holding Periods

Traders can hold positions created through margin trading for a maximum of T+N days. Here, N represents the number of days a position can be carried over, and T denotes the number of trading days. The specific value of N varies among brokerage platforms, depending on a trader’s relationship with a lender and the value of the pledged securities.

3. Enhances Purchasing Power

This facility empowers traders to leverage the securities in their Demat account, boosting their purchasing power. By taking a margin against cash, they have the opportunity to increase returns on their invested capital.

4. To Capitalise on Short-term Movements

The margin trading facility serves as an effective tool for capitalising on short-term price movements. Traders can use margin to purchase a large volume of stocks with a small amount, increasing their leverage. This enables them to secure significant profits from short-term price fluctuations.

Margin Trading Risk

While the margin trading facility offers advantages, it is essential to be aware of the associated risks. Here are some of the key ones to consider:

1. Obligation to Maintain a Minimum Balance

Traders utilising a Margin Trading Facility (MTF) must consistently maintain a minimum balance in their margin accounts. Failure to do so may result in brokers selling off some of their assets to meet the required minimum balance.

2. Asset Liquidation

If traders fail to comply with the terms of the margin trade agreement, brokers have the authority to take actions such as liquidating assets. For instance, if traders cannot meet a margin call, brokers can liquidate assets to recover the owed amount.

3. Enhanced Losses

While margin trading can amplify profits, it also increases the risk of losses exceeding the invested principal. Traders are required to pay interest on the borrowed amount, meaning that substantial profits from trades are necessary to cover these additional expenses.

4. Limited Range of Securities

Traders are restricted from using the margin trading facility for all stocks. SEBI has a specific list of approved assets for which brokers can offer this facility. Additionally, some stocks may be removed from this list by brokerage firms for security reasons. Margin trading is also not permitted for securities in the derivatives segment and mutual funds.

Conclusion

The Margin Trading Facility (MTF) becomes a valuable tool for traders aiming to boost their participation in the market. It provides them with increased buying power, making it possible to capitalise on short-term market shifts and potentially earn significant profits. Additionally, the flexibility to hold positions for longer durations and the opportunity to enhance buying power contribute to the overall attractiveness of MTF. For a smooth and efficient trading experience, you can take advantage of the margin trading facility through the best demat apps.