Margin Trading Funds (MTF)
Margin Trading Funding (MTF) is a flexible option for investors; it enables them to trade beyond owned resources and boost their profits if the prices increase on expected lines.
What is Margin Trading Funds?
- Margin Trading Funding (MTF) is a flexible option for investors; it enables them to trade beyond owned resources and boost their profits if the prices increase on expected lines. The facility is provided against a pre-approved list of securities by the broker, subject to predefined haircut for margin. A margin account’s buying power changes on a daily basis and depends on the price movement of the marginable securities. By using MTF, investors can raise money to buy additional securities without selling their long-term investments.
- Whenever an investor falls short of funding to buy shares, asks his broker to provide him with the shortfall amount. His broker instantly facilitates the amount to his margin funding account so that he can complete the transaction. To use this service, investors either need to pay a part of the total purchase value or pledge his existing approved securities as margin.
Requirements of Margin Trading Funds
- Investors who wish to avail the MTF need to undertake by signing/accepting additional Terms and Conditions. It ensures that investors are completely aware of the risk and rewards of trading in it.
- Allows investors to create leverage position in securities which are not part of derivatives segment.
- The positions can be created against the margin amount which can be in the form of cash or shares as collateral.
- Securities allowed under MTF are predefined by SEBI and Exchanges from time to time.
Cost of Margin Trading Funds
- Investor need to pay the interest on the amount they borrow. The longer they hold margin stocks they need a high return to break even.
Benefits Margin Trading Funds
- MTF is ideal for investors who are looking for benefit from the price movement in short-term but not having sufficient cash balance. Securities in the portfolio or demat account can be utilized as a security/collateral.
- Utilization of securities available in portfolio/demat account (using them as shares as collateral).
- MTF improves the rate of return on the capital invested.
- MTF enhance investors’ purchasing power.
- The market watchdog SEBI and stock exchanges continuously monitor the margin trade facility.
Risks involved in Margin Trading Funds
- Magnified Losses: If the margin can help investors magnify profits, it can also magnify losses. In fact, you can end up losing more than what you invested. Investors think that borrowing from brokers is simpler and dealing with them is easier than banks. But, little do they know that borrowing from brokers is as binding as they are with banks.
- Minimum Margin Balance: You are supposed to maintain a minimum balance in your margin trade account at all times. If your balance falls below the minimum balance, then your broker would ask you to maintain sufficient balance. If you are unable to maintain the minimum balance, then you would be forced to sell some or all the assets to maintain the minimum balance.
- Liquidation: Brokers have the right to initiate actions against the investors if they fail to keep up to the margin trade agreement. If you fail to meet a margin call, then the broker can liquidate your assets to recover the sum.
Practices for Successful Margin Trading Facility?
To minimize risks and increase the possibility of realizing gains from margin trading, consider the following:
- Invest Wisely: The rule of thumb here is that one should never invest a sum of money that he cannot afford to lose. Margin trading creates a risk of amplified losses. They should only invest if they have sufficient funds to weather a temporary move against their position and meet a margin call, if necessary.
- Borrow Less Than Allowed Limit: Just because an investor has access to more capital doesn’t mean that he should squander it by investing in every stock on the market. The best thing that the individual can do is to invest small amounts first. With time, he can build up his confidence and gain enough skills to invest in riskier but more rewarding stocks.
- Borrow only for short term: A margin loan is like any other loan. As is the case with a mortgage or a car loan, the margin account holder is required to pay a monthly interest charge. The longer he takes to pay the loan and the larger the sum of money borrowed, the higher the interest expense will be.