MTF - Margin Trading Facility

What is Margin Trading Facility (MTF) in stock market?

Have you ever wanted to buy more stocks than you could afford? Margin Trading Facility or MTF (e-margin) could be the solution. It lets you buy stocks by paying only a part of the total price. The remaining amount is borrowed from the broker, who charges a nominal interest on it.

This means you can trade with margin and purchase more shares than you would be able to otherwise. In other words, MTF allows you to use trading margins to increase your buying power. Sounds interesting, right?

How Margin Trading Facility (MTF) works?

Margin Trading Facility (MTF) provides you with additional leverage for trading, allowing you to buy upto 5x more shares than your available funds. By placing a small margin in cash or stocks as collateral in your Demat account, Kotak Securities funds the rest. With Pay Later (MTF), you only pay a fraction of the total trade value upfront, and Kotak Securities will cover the remaining. This facility helps you maximize your buying power and can also be used when you're short on funds. Simply put, buy shares now and pay later!

Let us understand this through an example.

Scenario:

• You have ₹20,000 and want to buy 1000 shares priced at ₹100 each.
• Total cost = ₹1,00,000 (₹100/share * 1000 shares).

Using Margin Trading Facility (MTF) with upto 5x Leverage:

• You only pay ₹20,000.
• Kotak Securities covers the remaining ₹60,000.

If the stock price rises to ₹110:

• Value of 1000 shares = ₹1,10,000 (₹110/share * 1000 shares).
• Profit = ₹10,000 (₹110,000 - ₹100,000) on your initial ₹20,000 investment, minus interest and brokerage costs.

If the stock price falls to ₹90:

• Value of 1000 shares = ₹90,000 (₹90/share * 1000 shares).
• Loss = ₹10,000 (₹100,000 - ₹90,000), plus interest on the borrowed amount.

You may also face margin shortfall requirements due to the drop in share value.

Risks & Best Practices for MTF

When it comes to margin trading, having a strategy in place is crucial. Here are some tips to help you trade more wisely and minimise risks:

• Set a stop-loss: Have you ever thought about what loss you are willing to tolerate? Setting a stop-loss lets you decide in advance. If the price falls below a certain point, the stop-loss automatically sells your shares, preventing further loss and protecting your investments.
• Stay informed: Are you keeping up with market trends? Staying informed about news, trends, and upcoming events can help you make smarter decisions. A well-informed trader is less likely to face unexpected losses.
• Diversify: Have you considered spreading your risk? Diversifying your investments across multiple stocks or sectors reduces the impact if one stock performs poorly. It is all about balancing your risk.
• Have an exit plan: Do you know when to exit a trade? Whether it is cutting your losses or locking in profits, having an exit plan is essential. Equally essential is sticking to it and avoiding emotional decisions that could lead to poor outcomes.