What is the Benefit of Margin Trading Facility

Last Updated: 17 Oct 2023

Margin Trading Facility or better known as MTF in market parlance, is a special privilege that is offered to buyers of shares and securities wherein they can buy worth more than they can afford to pay in cash. Here is how it works. Under the margin trading facility or MTF, you just pay a fraction of the total transaction value which is called the margin and hence the name. One of the biggest benefits of margin trading is that you can offer cash or shares as collateral margin. Of course, the value of your shares will be considered post haircut only. Apart from this, there are other benefits of margin trading. For example, you get leverage and we shall look at these margin trading advantages time and again through this section.

One of the biggest advantages of margin trading is that it offers leverage. Here is how it works. Say, you can afford to invest Rs.1 lakh then the broker will offer to fund you another Rs.2 lakh so with just Rs.1 lakh in your hand you can buy shares worth Rs.3 lakhs. That is a huge advantage although you do have to pay interest on the amount of loan utilized. There is one of the margin trading advantages that you must be familiar. In the past, SEBI used to insist on margins payable only in cash. However, post 2017, SEBI permits payment of margin even with just shares as collateral. So, you don’t utilize your valuable cash and you also make good use of your shares lying idle in the demat account. This is one of the major advantages of margin trading.

Another of the major advantages of margin trading is that it is regulated and done within the ambit of SEBI regulations. Brokers are willing to do it as it is back to back facility with collateral backing of shares bought. This substantially reduces the risk of the broker and hence they are willing to offer better terms on the margin trading facility. Of course, one of the limitation is that this MTF facility is only available on select stocks that are liquid but that is good in that it keeps risk under control.

Benefits of Margin Trading

Here are some of the key benefits of margin trading by having a margin trading account. Of course, you need to activate margin trading facility first. Here are some standout benefits of margin trading for investors and even for medium-term traders.

1. Margin trading is ideal for investors who are looking for the opportunity of short term price movement but do not have sufficient cash balance. Here, margin trading can fill the gap and provide liquidity.
2. If shares are lying idle in your demat account, the margin trading facility is a good way of utilizing or leveraging stocks available in your demat account. These shares can be offered as collateral margins to take MTF positions in the equity market.
3. Margin Trading can help you to Improve the percentage return on the capital deployed, or in short, improve your ROE. When you are trading on margins, you only pay around 25% of the cost. So, if the price moves up 5%, it is a 20% ROE gain for you.
4. Many times, investors miss out on very lucrative buying opportunities just because they not have the liquidity available with them. In such cases, the margin trading facility can help you to capitalize on these opportunities and enhance your corpus.
5. Even though you are borrowing, you are only using the loan to buy an appreciating asset like equity which creates wealth in the long run. That is good economics or positive EMI if we may call it so.

Having seen the benefits of margin trading, let us move on to the key features.

Features of Margin Trading

Here are some of the key features of the margin trading facility to be availed by clients at the broking house.

• All the investors who are looking to avail the margin trading facility are required to provide an undertaking by initialing their acceptance of all the Terms and Conditions applicable to the MTF, over and above the rules already applicable to the regular trading account. The margin trading facility is not a separate trading account but is offered in the same existing trading account and linked demat account, often with the convenience of an Online trading app.
• The MTF facility allows investors to create leveraged positions in securities, as a multiple of what they can afford based on cash on hand. This especially relevant in the non-derivatives segment where futures leveraging is not possible.
• Traders who avail the MTF facility can provide their margin amount either in cash or in equity collateral. However, the value of the equity collateral will only be considered after the normal haircut of 40% to 50% in the case of equities. Alternatively, trades can also offer the margin through a mix of cash and shares as collateral.
• There is no standard limit on the number of days the position can be carried forward and that is at the discretion of the broker and also customized based on the relationship that the broker and the client enjoy. Normally clients who give higher brokerage and have a longer standing relationship do get some special privileges. Normally, this extends for 2-3 months in majority of the cases.
• Brokers cannot offer MTF facility on all the stocks listed on the stock exchange. The master list is defined by SEBI which is the outer limit for offering the MTF facility to the clients. However, most brokers also impose their own level of checks and balances and even prune this list further in the interest of safety and security.
• Currently, the SEBI rules only allows corporate brokers registered with SEBI to offer the margin trading facility. Individual brokers and brokerages structured as partnerships cannot offer this facility.

Significance of Margin Trading

Margin trading is all about getting financial leverage. It gives you the privilege and advantage of buying stocks even when you do not have enough funds available with you to purchase these shares. Here is why margin trading facility can be very significant for traders and investors.

• Margin trading allows traders and investors to take the full benefit of short-term trading opportunities without delivery of shares and even when they do not have the funds required to take full delivery.
• It is like leveraged trading and very useful in stocks where futures are not available. You can buy or sell stocks by paying a fraction of the transaction value; and even that can be paid either in cash or in shares as collateral.
• Apart from the leverage factor, the most important reason why margin trading is significant is that it allows you to grab the ultra-short term opportunity available in the markets, which you would have normally missed out.
• It can help you to take positions beyond your basic affordability and that is very useful in high conviction calls. You often make a profit and regret you did not take a bigger position. Now that is not required.

Frequently Asked Questions

Are there different charges for MTF?

Normally, the regular equity delivery charge will apply to MTF also. However, interest cost is an added cost to the extent of debits on trading account.

What are the penalty for unsettled funds?

Penalties include additional charges, penal interest and also blocking of your margin account if you don’t bring in the minimum margin within 5 days.