What are the advantages of the Margin Trading Facility ?

The Margin Trading Facility, or MTF in market parlance, is a special privilege extended to purchasers of stocks and securities that allows them to purchase assets worth more than they can pay in cash. Here is how it functions. Under the margin trading facility or MTF, you only pay a fraction of the total transaction value, referred to as the margin, hence the name. One of the greatest advantages of margin trading is using cash or shares as collateral margin. Obviously, only the value of your shares after the severance will be considered. In addition to this, there are additional advantages of margin trading. For instance, leverage is available, and we will revisit these margin trading benefits throughout this section. Leverage is one of the most significant benefits of margin trading. Here is how it functions. Say you can afford to invest Rs. 1 lakh, then the broker will offer to finance you another Rs. 3 lakh, allowing you to purchase Rs 4 lakhs worth of shares with just Rs 1 lakh. This is a tremendous benefit, although you must pay interest on the loan amount utilized. There is a margin trading advantage with which you must be acquainted. In the past, SEBI required margins to be paid only in currency. However, as of 2017, SEBI allows margin payments with only shares as collateral. Consequently, you need to utilize your valuable cash and make excellent use of your shares that are sitting idle in your demat account. This is one of the main benefits of trading on margin. Another benefits of margin trading is that it is regulated and conducted following SEBI rules. As it is a back-to-back facility with collateral backing of purchased shares, brokers are prepared to do it. This significantly reduces the broker's risk, so they are willing to offer more favorable margin trading terms. One of the restrictions is that this MTF facility is only available for certain liquid equities, but this helps keep risk under control. The advantages of margin trading - Margin trading is ideal for investors interested in short-term price fluctuations but needs more capital. Here, margin trading can provide liquidity and cover the void. - Suppose shares in your demat account are sitting idle. In that case, the margin trading facility is a good way to utilize or leverage them. These shares can be provided as collateral margins for MTF equity market positions. - Improving the percentage return on the capital deployed, or ROE, is possible through margin trading. When trading on margin, you pay approximately 50% of the expense. Therefore, if the price increases by 10%, your return on equity will increase by 20%. Investors often lose out on extremely lucrative investment opportunities because they need more liquid assets. In such circumstances, the margin trading facility can assist you in capitalizing on these opportunities and growing your portfolio. Even though you are borrowing, you only use the funds to purchase an appreciating asset, such as equity, which will generate wealth over time. That is excellent economics or, if you prefer, positive EMI. After discussing the advantages of margin trading, let's continue on to its key characteristics. Characteristics of Margin Trading - All investors who wish to utilize the margin trading facility must provide an undertaking by initialing their consent of all Terms and Conditions applicable to the MTF and the rules already applicable to the standard trading account. The margin trading facility is not offered through a separate trading account but through the same and linked demat account. - The MTF facility enables investors to establish leveraged positions in securities based on a multiple of their available cash. This is notably important in the non-derivatives market segment, where futures leverage is impossible. - Traders who utilize the MTF facility can provide either cash or equity as margin collateral. In the case of equities, however, the value of the equity collateral will only be considered after a standard reduction of 20% to 30%. Alternatively, the margin can be offered through cash and shares as collateral. - There is no standard limit on how many days a position can be carried forward. This is up to the broker's discretion and can be tailored based on the broker's and client's relationship. Typically, clients who pay a higher commission and have an extended relationship receive special privileges. This typically lasts for two to three months in most cases. -The MTF facility cannot be offered on all securities listed on the stock exchange. SEBI defines the master list, which is the upper limit for offering the MTF facility to clients. In the interest of safety and security, most brokers impose their own checks and balances and even prune this list further. - Currently, only corporate merchants who are registered with SEBI are permitted to offer margin trading. Individual brokers and brokerages organized as partnerships are unable to provide this service. Conclusion The essence of margin trading is obtaining financial leverage. It gives you the privilege and advantage of purchasing equities even if you need more funds. The following explains why the margin trading facility is important for traders and investors. Margin trading enables traders and investors to take advantage of short-term trading opportunities without taking delivery of shares, even if they lack the necessary funds to take full delivery. It is similar to leveraged trading and extremely useful when futures are unavailable. You can purchase or sell stocks by paying a fraction of the transaction's value, which can be paid in cash or in additional shares as collateral. Aside from the leverage factor, the most significant aspect of margin trading is that it allows you to take advantage of ultra-short-term market opportunities you would have otherwise missed. It enables you to assume positions beyond your basic affordability, which is extremely useful in cases of high conviction. You frequently make a profit and then regret not taking a larger position. No longer that is required.