Margin Trading Facility (MTF) gives traders the ability to take larger positions in the equity market without paying the full amount upfront. This approach can increase your purchasing power and be helpful to get the opportunities that arise with market movements. With balanced usage, you can get flexibility and risk control with these securities’ investment options.
How Does MTF Work in Your Demat Account?
Margin Trading Facility on demat accounts allows you to purchase by paying a fraction of the total upfront cost and having the broker fund the remaining amount. Platforms like Kotak Securities allow you to pay a minimum of 25% of the trade value upfront via cash or stocks as collateral.
The broker funds the remaining amount and charges interest on the borrowed portion until you close or square off the position.
Ways to Use MTF for Higher Trading Leverage
There are multiple ways available to use MTF to get higher trading leverage. Here are a few of them mentioned:
1. Check Eligibility and Stock List
You must confirm if the stock is eligible for MTF and what leverage multiple is allowed before you place a margin trading facility trade. Platforms often publish a list of eligible stocks with different leverage multiples. Here’s how you go about it:
- In your demat account, open the section for the margin trading facility or Pay Later (depending on product naming) and search the ‘eligible stocks’ list.
- Search for the stocks you’re considering and check the leverage multiple columns. For example, one stock may offer you 4x whereas another may offer 3x, etc.
- Take note of the ‘maximum allowed exposure’ value, because it limits how large your borrowed position can be in that stock.
2. Calculate The Number of Shares You Need
Once you’ve selected the preferred stocks and know their allowed leverage multiple, the next step is to calculate how much capital you need to bring. Brokerage platforms often offer an MTF Calculator. Through this tool, you can put the market price, quantity, holding period, and target price. After that, the tool shows the total invested amount, interest (depending on the plan), brokerage, taxes and other charges, break-even cost, as well as net Profit/Loss.
3. Place The Trade Using the MTF Order Type
The following is a step-by-step procedure to make a trade under the MTF facility:
- Open the ‘Buy Order’ screen of your preferred stock within your Demat/trading account.
- Enter the amount and then select the product type of Pay Later or MTF.
- The amount required as upfront margin, the amount being funded, and the interest rate will usually be displayed to you. Accept the terms of borrowing and disclaimers.
- Review the details of the total exposure, your margin, the financing amount, and the approximate interest.
- Submit the “Buy” order. After execution, you have the entire position in spite of the fact that only your own funds were the margin.
Since you are carrying the financed part, the stock is normally secured or indicated as security under your account until you repay or close the position.
4. Monitor The Position and Manage Interest
Once you have put your MTF trade, you must pay close attention to the development since risk may build up. The following are the main management activities being carried out:
- Interest Cost: The interest is the amount that the broker charges for the amount you financed on a daily basis until either you pay it off or close the trade.
- Maintaining Margin: As the value of the position declines, your margin can drop to below the required levels, and a margin short-fall call can be made.
- Holding Period: MTFs are indefinitely held under this service, and this implies that you are subject to market risk in the long term.
- Exit Strategy: Plan ahead at what price you expect to exit.
- Review the Collateral List: Some of your shares or ETFs can be pledged, track the collateralised securities and the impact that has on your portfolio.
5. Close the Position and Understand Repayment
When you decide to quit or even need to relax the trade, usually, it goes like:
- You sell the shares that you have under MTF and pay the amount that is funded and the interest accrued. The interest and the amount borrowed are paid initially and the remaining is transferred to you.
- The collateral that has been pledged is released when obligations are fulfilled.
- You look at whether your net profit or loss after interest and costs was acceptable given the leverage used.
Disclaimer: No Business Standard Journalist was involved in creation of this content