Buying shares usually requires investors to pay the full purchase amount upfront. However, some trading services allow investors to buy shares by paying only a part of the total value. This facility is known as Margin Trading Facility (MTF). It allows eligible investors to use funds provided by a broker to purchase shares. While this can help investors manage their available capital, it also increases financial risk. Understanding the costs, rules and possible losses is important before using this facility.
What Is Margin Trading Facility (MTF)?
MTF is a facility through which a broker funds part of the cost of buying eligible shares. The investor pays a portion of the purchase value, while the broker provides the remaining amount, subject to applicable rules and limits.
For example, suppose you want to purchase shares worth ₹50,000. If the required margin is ₹20,000, you pay this amount from your own funds, and the broker finances the remaining ₹30,000. The exact margin requirement depends on the stock, broker and applicable regulations.
The shares purchased under MTF are subject to the facility’s terms and applicable pledge requirements. The investor must repay the funded amount along with the applicable interest and charges.
How Does Pay-Later Stock Buying Work?
MTF works differently from buying shares entirely with your own funds. The process generally involves the following steps.
1. Select Eligible Shares
Investors first check which shares are available for MTF. Not every listed stock qualifies for this facility. Brokers provide information about eligible securities and the applicable margin requirements.
2. Pay the Required Margin
The investor contributes the required portion of the purchase value. The broker funds the balance according to the facility’s terms.
3. Pay Interest on the Funded Amount
The broker charges interest on the amount funded. The rate and calculation method vary between providers. The longer the funded position remains open, the more interest the investor may have to pay.
4. Monitor the Investment
Investors need to track the share price, margin requirements and available funds. If the value of the shares falls, the broker may ask for additional margin or take action under the agreed terms.
5. Close the Position
When the investor sells the shares or otherwise closes the position, the funded amount, applicable interest and other charges must be settled as required. Any remaining amount belongs to the investor, after accounting for the relevant costs and obligations.
How MTF Can Increase Both Gains and Losses
The main attraction of MTF is that investors can take a larger position without paying the entire purchase value upfront. However, this also increases the impact of price movements on their own capital.
Suppose a person invests ₹20,000 and the broker contributes ₹30,000 to buy shares for a total of ₹50,000.
The share price goes up to ₹55,000 before interest and other charges. This profit is 25% of the investor’s ₹20,000 investment.
But once the share value drops to ₹45,000, the position will be worth ₹5,000 less before charges. This equals a 25% loss on the initial contribution.
These examples are based on the assumption that the funded amount is ₹30,000 and do not include interest, taxes and other costs. Actual results may vary. If there is a sudden drop in price, the investor’s capital can be diminished in a short period of time and a margin call may occur or the investor may be forced to sell.
What to Check Before Using MTF
Always check the conditions and fees at an MTF before trading with an on-line trading app.
- Understand the interest charged upon the amount borrowed, and how it is computed.
- Understand initial margin and potential for further margin requirements.
- Check if selected stock qualifies for the facility.
- Review the broker’s rules for the length of time that positions can be held.
- Check brokerage, taxes and fees as applicable.
- Determine loss limit and when you can get out of the position.
Avoid borrowing to invest simply because the facility is available. MTF may not suit investors with limited experience, uncertain cash flow or a low ability to absorb losses.
Using an Online Trading App for MTF
An online trading app will help the investors check out eligible shares, review margin requirements and open positions. Interest rates, funded amounts and margin alerts are also some of the features that may be visible on some platforms.
But the use of apps doesn’t eliminate risks of leverage. In the event an investor orders, he or she should read the terms, check all fees and be aware of the margin shortfall risk.
Conclusion
MTF provides investors to purchase eligible shares and deposit a percentage of the purchase value, with the remainder paid by the broker. This can make the investment bigger, but it also makes the impact of the price change more significant and it increases the interest costs. Know the margin rules, repayment terms and potential loses before utilizing this facility. While an online trading app such as 5paisa can simplify the process of monitoring, it’s crucial to conduct thorough research and employ risk management strategies. Use MTF only if you know what responsibilities are involved, and are able to handle the financial risk.
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