A Margin Trading Facility is a standard stock market practice that amplifies your trades by helping you borrow money from a broker or broking company. With MTF, you can trade in a variety of financial assets, including stocks, bonds, and commodities, giving you absolute freedom.
Though Margin Trading seems appealing, it has both benefits and downsides. You have to consider both points before starting trading. In this blog, we’ve listed five things that you must know about Margin Trading Facilities to help you take complete advantage of leverage.
Benefits of Margin Trading Facility
Here are the benefits of margin trading.
1. Increased Buying Power
One of the most appealing benefits of MTF is higher buying power. This feature enables potential traders to borrow money from brokerage companies to take a larger position in the market.
In this way, margin trading facilities can help you gain higher returns than trading alone with your own capital.
For example, if you have ₹100,000 in your demat account and your respective broker is offering 4x leverage via MTF, you can now trade with ₹400,000. It can increase your buying power, especially during an uptrend in the market.
2. Flexible Trading Opportunity
Margin Trading Facility provides a higher sense of flexibility to traders, which allows them to take advantage of short-term market movements without requiring any large amount of upfront capital.
Simply put, you can borrow money at any instant and enter or exit the positions more efficiently based on your adjusted strategies or market conditions. It is particularly beneficial for day traders and swing traders, who capitalize on market volatility.
Plus, we can use MTF across a variety of assets, such as stocks, commodities, and currencies. It allows traders to diversify their portfolios and benefit from leverage in both the short and long term.
3. Opportunity to Maximize Returns
A Margin Trading Facility is made to increase the returns. As you are trading with borrowed funds, even a slight upward movement in your underlying asset will result in significant profit margins.
For instance, if the price of the stock you purchased has been increased by 10%, the profit received will be over the entire position value, not just your own capital.
Hence, this leverage effect can help you gain substantial returns, making MTF an attractive trading feature for experienced traders with a well-crafted strategy.
Risk of Margin Trading Facility
Here are the risks related to MTF:
4. High Risk of Losses
Margin Trading Facility is a trading feature that can magnify your trading results. Thus, when the market moves against your favorable position, losses will be incurred on the entire leveraged amount, not only your initial capital.
This may lead you to incur heavy financial losses, especially during volatile markets.
For example, if the value of your purchased underlying stock is reduced by 10%, the losses will be incurred over the entire leveraged amount, not just on your capital investment.
Therefore, for this very reason, a margin trading facility is suitable only for experienced traders who have the capability to handle potential downsides and manage risks associated with strategies like stop-loss and portfolio diversification.
5. Liquidation
MTF gives brokers the right to close your positions when the margin requirements are not met, and you don’t add the required funds on time. Here, a broker can automatically square off your position.
Forced liquidation occurs more often in volatile markets, which may even lead traders out of position before even giving any opportunity to recover or make adjustments. This may lead to financial distress or legal consequences.
Conclusion
In summary, MTF (Margin Trading Facility) is an impactful tool that can increase your trading potential. However, it involves significant risk. Thus, first, understand how MTF works and then think about its implementation while online investing or trading.
