Margin Trading Facility (MTF)

Margin Trading Facility (MTF) is an exchange-approved product wherein individuals can purchase stocks by paying only the initial margin, with the remaining amount being funded by Kotak Securities Ltd. One can either keep the position open as long as they want or can take delivery of the stock.

If you are wondering what is margin trading in the stock market, let us help you out. It is a strategy that lets you borrow funds from your broker to buy more securities than your available cash would allow. This means that you trade on the margin using borrowed money to increase your buying power. MTF, in turn, allows you to invest more and increase your profits. However, here is the catch — margin trading is not without risks. If your investments do not perform as expected, the borrowed money still needs to be repaid, which could lead to significant losses.

Wanting to know what margin trading is in the share market? Margin trading is a strategy that lets you buy shares using borrowed funds from your broker. In margin trading, the broker sets a margin requirement, which is a percentage of the total value of the shares you want to buy.

Let’s take a look at an example to understand better. If the broker requires a 25% margin, you will need to contribute 25% of the share’s value. Let’s say you want to buy shares worth ₹1 lakh. You would need ₹25,000 upfront, and the broker would lend you the remaining ₹75,000.

This trade margin allows you to invest more than you would with just your available cash, thus enhancing your buying capacity. But before jumping in, it is crucial to remember that margin trading involves risk.

Kotak Securities offers lower MTF rates of 9.75% per annum or 0.0267% per day, which are applied from T+1 day onwards on the Trade Free Pro Plan. These charges vary based on your selected brokerage plan.

To trade with margin at Kotak Securities, you need to accept the MTF disclaimer after reviewing it. Additionally, you must maintain the required margin balance and pledge eligible securities as collateral. The security purchased under Margin Trading Facility (MTF) needs to be pledged. Alternatively, you can also pledge other eligible securities to avail margin and then trade with margin under MTF. Kotak Securities will then set margin maintenance levels, which must be adhered to in order to continue margin trading. It is a must to also comply with regulatory guidelines to ensure smooth trading with margin.

Trading on the margin does involve significant risks, especially for beginners. While on the one hand, it boosts your buying power; on the other hand, it also means you are borrowing money that needs to be repaid, despite your trades not performing well.

Losses can quickly surpass your initial investment. Beginners should approach margin trading cautiously and assess their risk tolerance before leveraging funds in the stock or share market.

The holding period on MTF with Kotak Securities is unlimited. This means that you can hold a stock for an unlimited number of days in MTF with Kotak Securities. Do note that interest charges will apply for the duration of the position, basis your pricing plan.

Margin trading facility, can be powerful if you aim to maximize the potential of your business. This feature makes it possible to place more bets on the market than your account balance usually is able to allow, which can result in a higher profit margin by increasing purchasing power.

The creation of a MTF position against shares as collateral is now open to investors. SEBI and Exchanges keep a close eye on the securities that qualify for the MTF, and they periodically prescribe the margin that must be placed on such securities (either in cash or as shares of collateral).

With Kotak Securities Ltd, once you have pledged your MTF stocks, you can maintain your position for as long as you wish, or you may choose to convert the position to cash.

To create an MTF position, you can utilise cash, existing stocks, and ETFs held in your Demat account as collateral, post-pledging.

With the introduction of the pledge model in September 2020, it has become mandatory to pledge stocks purchased under the Margin Trading Facility.To hold your MTF position for as long as you want, user are required to pledge the stocks purchased under MTF on T Day on the link received from NSDL.

Yes, there is a charge of Rs.20 + GST per ISIN for both pledging and unpledging.

In the event that you fail to pledge the stocks purchased under MTF, your position will be liquidated.

Benefit: Leverage enables you to amplify returns on a smaller investment, as seen when paying only 20% upfront for a 10% return on the stock price, resulting in a 50% return, pre-cost.

Risk: However, it's crucial to note that leveraging also adds losses on a smaller investment. For example, paying only 20% upfront for a 10% loss on the stock price means you lose 50% of your capital, pre-cost. Understanding the risks associated with Leverage is vital for informed decision-making.

Benefit: Unlimited holding period allows you to hold a trade indefinitely if you believe it offers a better chance of making a profit.

Risk: Nevertheless, holding a trade for an extended period increases your interest costs, raising the breakeven for your trade. Additionally, if the trade moves against you, you may need to provide higher margins or face liquidation.