What is a Margin Trading Facility (MTF)?
Stock trading in the market tends to demand greater amounts of capital than that of a trader who has the cash at hand. It is here that the leveraging tools find their use. Margin Trading Facility (MTF) and the Pledging of shares are two strong and widely used tools that enable a trader to boost one's purchasing power. Though both techniques offer access to additional funds, they operate in distinct manners and are appropriate for distinct types of traders and trading situations.
This article will give an in-depth, yet easy-to-understand, explanation of these two amenities, digging into their definitions, primary distinctions, and when it's optimum for one to utilise each of them. This manual will assist an investor in knowing how to employ such instruments safely and efficiently to maintain one's investments. The trader/investor should always know enough before employing such financial instruments so as not to get into potential pitfalls.
What is a Margin Trading Facility (MTF)?
Margin Trading Facility (MTF) is a unique SEBI-regulated product under which a trader is allowed to buy new shares with very little cash. Another name given to this facility is E-margin or "Pay Later." MTF permits traders to purchase stocks by paying just a part of the total amount upfront. The broker finances the rest.
Example of Margin Trading Facility MTF:
For instance, if a share costs ₹800 and the leverage permitted under MTF is 4x, then one only has to pay ₹200, and the broker will pay the remaining ₹600. This gives the trader an ability to purchase more shares than using only one's own money. The only difference with MTF is that pledging of investor's shares is required and this must be done under time requirements. The instant a trader purchases shares via MTF, he/she is required to mandatorily pledge them back to the broker. They have to do this by a deadline, typically 9:00 PM on the same day they acquired the shares.
What if Shares are Not Pledged Back to The Broker?
In case the investor does not fulfill this requirement, the shares will be sold automatically, or "squared off," by the broker the following morning. This is an important regulatory provision to ensure that the money lent by the broker has collateral.
MTF is a useful method for short-to-medium term trading because traders can hold positions for many days or weeks, unlike intraday trading where a trader has to close positions by the end of the day. The catch with MTF is that the trader is borrowing money from the broker, and they will be charged a daily interest on the borrowed amount. The interest rates typically range from 9% to 15% per annum. A one-time pledge/unpledge charge also applies to these transactions. The list of shares eligible for MTF is regulated by SEBI and also determined by individual brokers. This also assists in managing risk for both the broker as well as the trader.
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