'Buy now, pay later' for stock purchases: Good and risky of investment

Investors should assess their financial situation and risk tolerance before engaging in margin trading

‘Buy now, pay later’ has in recent years enabled shoppers to acquire goods and services without making immediate full payment. The concept is now making its way into stock trading, allowing investors to purchase shares with deferred payments. While this approach may seem appealing, it comes with both opportunities and risks.

 

Margin trading facility (MTF) allows people to leverage the funds of stockbrokers to purchase additional stocks when they lack sufficient capital. The MTF book stood at over Rs 72,634 crore on February 20, according to data from the National Stock Exchange of India.

 

How does MTF work

 

 

MTF allows you to purchase shares by paying only a fraction of the total cost upfront, while your broker funds the remaining amount and charges interest on the borrowed sum.

 

Here's how it operates:

 

Investors must provide an initial margin, either in cash or by pledging existing shares.

 

The broker covers the rest of the investment amount as a loan.

 

Only stocks classified as ‘Group I securities’ are eligible for MTF. Investors can borrow funds to purchase these shares and use them as collateral when pledging existing holdings.

 

Mehak Tomar, founder and chief executive officer of India's Future Investors, explained the pros and cons of using the 'buy now, pay later' option for stock purchases

 

Pros of Buy now, pay later

 

Enhanced purchasing power: BNPL allows investors to acquire more shares than their immediate capital permits, potentially leading to increased returns.

 

Immediate market access: Investors can seize timely opportunities without waiting to accumulate sufficient funds.

 

Cons of Buy now, pay later

 

Amplified losses: While potential gains are increased, losses can also be magnified, potentially exceeding the initial investment.

 

Interest and fees: Borrowing funds incurs interest charges and fees, which can erode profits, especially if investments don't perform as expected.

 

Margin calls: A decline in the value of purchased securities may prompt brokers to demand additional funds or liquidate assets to cover the shortfall.

 

How to place a ‘pay later’ order with MTF:

 

Search for a stock and open 'order pad' of the stock.

 

Select ‘pay later’ in the order type menu on top.

 

Swipe to place the order. The executed order can be viewed in the order book or position

 

“Investors should thoroughly assess their financial situation and risk tolerance before engaging in BNPL or margin trading strategies,” said Tomar.