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The stock market offers a myriad of opportunities, and for many traders, extending their reach beyond readily available capital can be a game-changer. This is where the Margin Trading Facility (MTF) comes into play. Share India, a prominent online trading platform, empowers its clients with MTF, allowing them to expand their trading capacity and explore more market avenues.
This blog delves into what MTF entails, its potential advantages and associated considerations, and how you can seamlessly activate this facility with Share India.
Table of Contents
What is Margin Trading Facility (MTF)?
At its core, MTF empowers investors to acquire securities by paying only a portion of the total transaction value upfront. The remaining amount is funded by the brokerage firm, such as Share India. This initial contribution from your end is known as the “margin”, and the shares purchased using this facility are held as collateral by the broker until the outstanding dues are settled.
MTF is regulated by the Securities and Exchange Board of India (SEBI), ensuring a structured framework for its operation within the Indian stock market. It’s available for select approved securities, and the margin requirements and interest rates are clearly defined.
How MTF Works?
Illustration 1: Basic Use of MTF
- Mr. Arjun wants to buy shares worth ₹1,00,000 but has only ₹50,000.
- He opts for MTF through platforms like Share India.
- With a 50% margin requirement, he contributes ₹50,000 from his own funds.
- Share India funds the remaining ₹50,000.
- Shares worth ₹1,00,000 are purchased and held as collateral by Share India.
- Mr. Arjun is charged interest on the borrowed ₹50,000 until it is repaid.
Illustration 2: Practical Use of MTF
- Total investment via MTF = ₹1,00,000 (₹50,000 own + ₹50,000 borrowed)
- Share price rises by 10%, making the investment worth ₹1,10,000
- Market Gain (10% Increase): ₹10,000
- Interest charged by Share India = ₹500
- Net Profit: ₹10,000 – ₹500 = ₹9,500
- Return on Investment: ₹9,500 return on ₹50,000 investment = 19% return (Compared to only a 10% return without leverage)
However, MTF trading in the capital markets involves risk, and outcomes can vary depending on market conditions. These examples are for illustrative purposes only. Real-world market conditions can be unpredictable, and while MTF can show potential for prospects, it can also magnify losses during downturns.
Leverage is a double-edged sword, and MTF should be used with a clear understanding of the risks involved. Investors are advised to evaluate their risk appetite, investment horizon, and financial goals before opting for leverage-based products like Margin Trading Facility.
Potential Advantages of Using MTF
MTF can offer several avenues for expanding your trading strategies:
- Enhanced Buying Capacity: One of the primary attractions of MTF is its ability to increase your purchasing power. With limited upfront capital, you can take larger positions in the market, allowing you to participate in opportunities that might otherwise be out of reach.
- Flexibility in Position Holding: Unlike intraday trading, where positions must be squared off within the same trading day, MTF allows you to hold positions for as long as you want, if you maintain your margins and respond to margin calls in a timely manner. This provides flexibility to hold positions as per your trading outlook.
- Strategic Market Participation: MTF enables you to react quickly to market movements and enter positions, even if you don’t have the entire capital immediately available.
- Optimisation of Available Funds: For investors who prefer to keep a portion of their capital liquid, MTF allows them to utilise a smaller portion as margin while still taking significant positions in the market.
Important Considerations and Risks
While MTF presents potential avenues for expanding your market involvement, it’s crucial to be aware of the inherent risks and responsibilities:
- Amplified Market Fluctuations: Just as MTF can allow for expanded market exposure, it can also amplify the impact of market movements. A downward movement in the price of your MTF-purchased securities can lead to a more significant erosion of your capital compared to an unleveraged position.
- Interest Costs: The borrowed amount under MTF incurs an interest charge. This cost accrues as long as the position remains open. If a position is held for an extended period or if the market movement is not as anticipated, these interest costs can influence the overall outcome of your trade.
- Margin Calls and Liquidation Risk: This is a critical aspect of MTF. If the value of your MTF-purchased securities falls and your margin drops below the required maintenance level (as per SEBI and Share India’s policy), you will receive a “margin call”. This is a request to deposit additional funds to bring your margin back to the required level. Share India typically informs investors of their applicable margin status and any shortfall on a daily basis via email. Failure to meet a margin call within the stipulated timeframe can lead to the forced squaring off of your positions. This liquidation may occur at market prices, potentially resulting in an erosion of capital and loss of control over your trade’s exit.
- Market Volatility: Market volatility can significantly impact your trading positions and the value of your investments. During periods of high volatility, the prices of securities can fluctuate rapidly and unpredictably, increasing the overall risk in the market. As a protective measure, brokers may raise margin requirements to safeguard against potential losses. This means you may need to maintain a higher amount of funds or collateral in your account to support your open positions.
- Liquidity Risk: Some stocks may have lower trading volumes, making it challenging to exit your positions quickly at anticipated prices, especially during periods of market stress.
- Event-Based Risks: Corporate actions such as mergers, demergers, stock splits, or a stock’s removal from the eligible MTF list may require you to close your MTF position before the ex-date or within a specific timeframe, failing which a forced square-off may occur.
It’s paramount to regularly monitor your MTF positions, understand the margin requirements, and maintain a buffer to address unforeseen market fluctuations or margin calls.
How to Get Started with MTF on Share India
Share India has streamlined the MTF activation process for its clients:
- For New Clients: If you are opening a new trading account with Share India, you can opt for the Margin Trading Facility during the account opening process. Simply select the MTF segment when choosing the trading segments you wish to activate.
- For Existing Clients: If you already have a trading account with Share India, activating MTF is a straightforward online process. Simply visit
Once activated, placing an MTF order is integrated into the regular order placement flow on Share India’s digital platforms (website, mobile app). When buying a stock, you will have the option to select “MTF” as the product type.
For any issues or support during the activation process, you can contact the Share India support team via email at [email protected] or by phone at 1800 203 0303.
You can also find the process to activate MTF with Share India here:
Conclusion
Margin Trading Facility with Share India offers a powerful tool for experienced traders seeking to expand their market participation. By understanding its mechanics, potential advantages, and crucially, the associated risks and responsibilities, you can make informed decisions. Share India is committed to providing a transparent and efficient MTF experience, supported by clear guidelines and accessible customer support.
Always assess your financial goals, risk appetite, and market understanding before engaging in leveraged trading products like MTF. For any assistance or clarification regarding MTF, feel free to reach out to Share India’s dedicated support team.For a detailed, step-by-step guide on how to open your account with Share India, click here.