What is Margin Trading Facility?

Investing in markets isn’t a game. It is a financial decision that carries with it a certain measure of risk. And as in any financial decision, it goes without saying that investing in or trading securities involves a considerable amount of money.

Where does that money come from, though? It would be a part of what you have earned and saved, certainly, but what if you suddenly fall short of funds? For markets are nearly always unpredictable and there is no sure-fire guarantee that your investment decisions will necessarily pay off. You might end up facing losses in investments and thus fall short of funds to tap new opportunities arising in the market.

This is where a unique solution named Margin Trading Facility comes into play. Like any financing solution in your life on which you might depend when falling short, it enables you to literally borrow funds from a broking house to buy new securities in the market.

Still a little confused about how it works? Let’s find out how this financing solution works.

What is it, exactly?

MTF, which is short for Margin Trading Facility, is a regulated financing solution that nearly every broking house in the country offers to its customers. Simply put, it allows you to buy new stocks and securities by paying merely a fraction of their original market price. You might ask who pays the remainder. The answer to that is: the broking house covers the remaining cost.

Let’s understand this with an example.

Suppose your cash balance stands at ?1000. But you wish to buy shares worth ?5000, following a recommendation by your advisor or relationship manager.

Normally, you would fret about how to arrange the remaining funds. Or you would try to sell some of your holdings to raise enough liquid funds to buy new opportunities. But your broking house would offer you another alternative – to avail Margin Trading Facility.

By availing it, you will pay merely a fraction of the original market price of the new transaction, and your broking house will pay the remaining sum. Thus, you have borrowed a certain amount of money from your broking house to buy new opportunities from the market.

How does it work?

To begin with, when you choose to avail MTF, your broking house requires you to deposit a specific margin amount. This margin amount is a fixed percentage of the total value of the trade order or security to be bought. It should be noted that this is the fractional amount that will be borne by you when buying the specific stock or placing the order in MTF category.

The remainder of the total value of the order or security will be paid by the broking house accordingly. This will be the sum that you have borrowed from the broking house by availing this facility.

According to the terms of the facility, the stock(s) or securities that you buy by availing MTF will be held as collateral against your repayment of the amount that has been borrowed. You can

either choose to repay the amount plus interest or, if falling short of funds again, sell the shares held to pay off your MTF debt.

Advantages of Margin Trading Facility

By availing this facility, one is usually able to tap the latest opportunities in the market without any liquidity constraints. Let’s understand some key advantages of Margin Trading Facility to a better extent.

1. Purchasing Power for Opportunities: To invest in every new opportunity in the market, one needs enough purchasing power at all times to capitalise on it at the right time and at the right price. With Margin Trading Facility, you can do this even with the same capital you have at hand and seize the latest opportunities without any delays or hassles.

2. Ease and Flexibility: Many broking houses provide, to their clients, a good array of options for margin trading as a part of the overall facility. Thus, investors and traders can either choose to buy long-term positions in stocks or trade new opportunities for a short duration only. According to one’s preferences, one can choose how much margin to pay and how much to borrow to capitalise on the same.

3. Option to Hold Positions with Margin: Margin Trading Facility also gives you the option to hold your existing position in a potentially good stock by investing an additional amount in it without worrying about liquidity. Thus, you don’t need to exit from any existing good opportunities that are to be found in your portfolio.

4. Prospect of Suitable Returns: Margin Trading Facility essentially gives you leverage to capitalise on new opportunities in the market. If you are able, with experience, to harness this to your advantage, you will be able to tap into multiple opportunities and thus benefit from the opportunity of better returns scenarios, though this is of course subject to market risks and conditions.

Risks In Margin Trading Facility

There are many attractive advantages of availing Margin Trading Facility but there are some risks and adverse factors to consider.

1. Interest charges: Margin Trading Facility works like any other financing solution, which means that the sum borrowed has to be repaid along with interest. Now, while interest rates for MTF are generally competitive and reasonable, it is nevertheless an additional expense that can take a piece out of the possible gains earned. Therefore, an investor or a trader should know how to use this facility wisely so as to capitalise on new opportunities and earn gains that can counterweigh the interest charges.

2. Loss in the market: This is again related to the first risk mentioned above. If you face a loss after buying new stocks or positions in the market, your loss will be magnified to a certain extent since you have availed margin leverage.

3. Margin Calls: If the price of the stocks or positions that you have bought in the market through MTF falls below a certain level, the broking house might require you to sell your holdings taking margin calls to recover the amount borrowed by you. This means that you will end up losing your holdings as well.

The Verdict

While Margin Trading Facility might seem appealing to even a novice trader or investor, it should be remembered that it isn’t exactly child’s play. A relatively inexperienced trader or investor might end up losing even more money by not being able to use this facility optimally or strategically. One needs a lot of experience as well as a lot of first-hand understanding of exactly how markets move and behave to use it to one’s advantage. Therefore, while novices are definitely entitled to avail the facility, they would also be advised to hone their knowledge and skills before deciding to opt for the same.

MTF by Mirae Asset Sharekhan

Mirae Asset Sharekhan is one of India’s most recognisable and reputed full-service broking houses that also aids its customers in their wealth creation and management objectives. They offer all the SEBI-regulated benefits of MTF and also provide a separate MTF Holding Report for better convenience for the customer. One can also use their free Margin Calculator to determine the margin required for different trades and positions across Equity, Derivatives, Commodities and Currencies.

Using this free tool, a trader or investor can calculate the following types of margin requirements:

1. SPAN margin: Standardised Portfolio Analysis of Risk – a margin system adopted by most F&O exchanges globally. SPAN levels vary about 6 times on a trading day and they are calculated basis the maximum loss one can face in markets.

2. Value at Risk margin: This is calculated basis the possibility of loss in the underlying asset’s value. This is done by analysing historical price movements and the present volatility levels.

3. Extreme Loss margin: This is determined using rolling data from the last six months and is generally 1.5 times or 5% higher than the standard deviation of the daily returns over the last 6 months.

4. Exposure Margin: This is charged over and above the SPAN margin to cover the broker’s liability, due to volatile movements in the market.

With such advantages and features in store, an investor or trader can consider availing Margin Trading Facility with Mirae Asset Sharekhan.