Investing in equities requires timing and capital. Oftentimes, it is quite possible that market opportunities have been presented to investors who, at the moment, may not have the funds for immediate investment. As such, this created a niche for the Margin Trading Facility (MTF), which is a very viable solution. MTF provides a means for investors to buy shares by putting down a fraction of the total value up front, while the balance is covered by the broker. Online platforms have made it easy and more structured to provide this facility for retail investors.
What is Margin Trading (MTF)?
The Margin Trading Facility (MTF) is a service provided by stockbrokers whereby investors are able to buy shares by depositing only a part of the total consideration value for a transaction. The balance is financed by the broker. This service is available only for delivery-based trading, whereby the investor may take the delivery of the shares into its demat account.
In the MTF version operated from an online platform, all these operations stand automated. An investor simply logs in, checks for margin availability, views eligible stocks, and executes their own trades without any human intervention.
How Does MTF Work?
The workings of Margin Trading (MTF) come down to understanding the following simple steps:
Initial Margin Contribution
The investor is required to deposit an upfront margin, representing a certain percentage of the total trade value. This can either be in cash or by pledging existing shares.
Funding by Broker
The broker finances the balance amount, which allows the investor to take delivery of shares worth more than his cash.
Pledging of Shares
Shares, once bought, are pledged with the broker or the clearing corporation as collateral against which the broker has security for the funded amount.
Interest on Funding
Since the broker is funding the trade partially, interest is charged against the part financed. Usually, this interest will be calculated on a daily basis, and billed at the end of each month.
Settlement and Holding
Shares purchased under MTF will be credited to the investor’s demat account but remain pledged until the funded amount along with interest is cleared.
Square-off or Conversion
The investor can either square off the position by selling the shares or convert the position into full ownership by paying the funded amount.
Eligible Stocks for Margin Trading (MTF)
Not all stocks are eligible under the Margin Trading Facility. The regulatory framework prescribes which shares are eligible. Broadly, the eligible stocks fall into:
Stocks that form a part of the approved list given by the exchanges.
Stocks belonging to Group 1 securities under the categorization made by exchange.
Securities which match liquidity and compliance criteria defined by SEBI and stock exchanges.
Stocks are usually very liquid and traded with volume falling under the MTF eligibility category. Illiquid or volatile ones are generally excluded to reduce the company’s risk. Investors may check the list of eligible stocks directly on their broker’s MTF online platform, which gets updated periodically with the exchange notifications.
Advantages of Margin Trading (MTF)
Without blowing their own trumpet, the positive utility of MTF to investors has to be highlighted:
Capital Efficiency
Investors can become a party to larger trades without raising the entire cash amount upfront. This permits a better allocation of capital across a portfolio.
Opportunity to Build Positions
When the market presents opportunities, investors are free to act without any restrictions imposed by short-term liquidity considerations.
Flexibility in Funding
Investors have the option to finance part of the margin requirement by pledging existing shares, thus reducing immediate cash outflow.
Longer Holding Period than Intraday
Unlike intraday leverage, MTF allows holding shares for more than a single trading session as long as the margin and interest obligations are settled.
Risks to Consider
Margin Trading (MTF) is a two-edged instrument. It enhances purchasing power while also bearing risks that require careful evaluation by the investors.
Market Risk
In cases where the price of the stock goes down, loses can be magnified since one’s exposure is much larger than the size funded by his capital.
Interest Cost
Interest charged on the funded amount does add to the overall cost of investment. In such cases where the stock does not appreciate considerably, it would serve to diminish or completely wipe out any gain.
Margin Calls
Should the value of pledged securities fall, a margin call from the broker for additional margin (cash or collateral) can be expected. Noncompliance with margin calls may result in liquidation.
Regulatory Restrictions
The exchange may change the list of eligible stocks in accordance with its guidelines, which will affect existing positions.
MTF Online: Ease of Use
The digitalization of trading has made the MTF online facility truly seamless. Some features offered are:
Instant Margin Calculation – Investors can check the available margins and all funding requirements in real time.
Automated Pledging – Shares bought are automatically pledged, thus saving the investor the nuisance of paperwork.
Consolidated View – Investors can view funded position, margin obligations, and accrued interest in one window.
Alerts and Notifications – Alerts are sent out by the system for margin calls and payment reminders for the investor to manage his obligations.
Who Should Use Margin Trading (MTF)?
Margin Trading Facility can be appropriate for investors who:
Have a view on equities in the medium term.
Understand the market risk and are comfortable managing leveraged positions.
Have existing holdings or sufficient liquidity to meet margin calls, if required.
Prefer flexibility in capital allocation without other unnecessary liquidation.
Conclusion
Margin Trading (MTF) fills the gap between opportunity and capital available by allowing the investor to buy stocks on the basis of partial funding. Online MTF services have provided greater transparency and convenience for investors with a platform that gives real-time access to stock eligibility, margins, and obligations.
