Stock trading in the market tends to demand greater amounts of capital than that of a trader who has the cash at hand. It is here that the leveraging tools find their use. Margin Trading Facility (MTF) and share pledging are two strong and widely used tools that enable traders to boost their purchasing power. Although both techniques offer access to additional funds, they operate in distinct manners and are suitable for different types of traders and trading situations.
This article provides an in-depth, yet easy-to-understand, explanation of these two amenities, exploring their definitions, primary distinctions, and when it is optimal to utilise each of them. This manual will assist an investor in knowing how to employ such instruments safely and efficiently to maintain one’s investments. The trader/investor should always know enough before employing such financial instruments so as not to get into potential pitfalls.
What is a Margin Trading Facility (MTF)?
A Margin Trading Facility (MTF) is a unique, SEBI-regulated product that allows traders to buy new shares with very little cash. Another name given to this facility is E-margin or “Pay Later.” MTF permits traders to purchase stocks by paying just a part of the total amount upfront. The broker finances the rest.
Example of Margin Trading Facility MTF:
For instance, if a share costs ₹800 and the leverage permitted under MTF is 4x, then one only has to pay ₹200, and the broker will pay the remaining ₹600. This gives the trader the ability to purchase more shares than they could with their own money. The only difference with MTF is that the pledging of investors’ shares is required, and this must be done within the specified time requirements. The instant a trader purchases shares via MTF, he/she is required to mandatorily pledge them back to the broker. They must complete this task by a deadline, typically 9:00 PM on the same day they acquired the shares.
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