Trading and investing in the stock market comes with several advantages and the main appeal of investment in shares and related securities is the potential of gains. The margin trading facility (MTF) is a service that broking houses/brokers offer investors in the absence of an investor’s own funds to make trades possible. In other words, if investors do not have adequate capital to trade, the broker lends the investor the money that the investor falls short of to make investments. The margin trading facility has key features that translate to benefits for the investor who wants to make the most of investing opportunities. Hence, if you are an investor, this is worth knowing about.
Margin Trading Facility – Basics Explained
Before learning about the features of the margin trading facility, you should know exactly how this service, offered by brokers, works. When investors use the margin trading facility or buy securities ‘on a margin’, they are essentially availing of a loan to buy securities. This loan works like any other loan, and it has to be repaid at a future date with interest. The idea behind this facility is that investors can make the most of investment opportunities instead of missing out on them due to an absence of funds. Additionally, investors may consider that, if their trades go well, they can repay the loan taken from the broker from the profits that they may potentially earn.
The Key Features of the Margin Trading Facility (MTF)
If you are an investor who wants to invest in the Indian share market, a lack of funds shouldn’t stop your attempt to make the most of potentially lucrative investment opportunities. Buying or trading on a margin in the share market is a way to afford your investments without liquidating your other assets because you require funding. As an investor, you should know about certain advantageous facilities and services that can enhance your investing activity and the MTF is one of them. Here are the key features of the margin trading facilities you should be aware of:
MTF is a Loan
By availing of the margin trading facility, you are basically taking a loan from your broker to buy and invest in securities like stocks. You may have part of the funds to buy stocks, and the rest can be generated through the margin trading facility from your broker. This ‘loan’ that you take from your broker is taken against some collateral, which may constitute the assets that you hold as an investor.
Loan Repayment
Since the margin trading facility involves a loan that investors take from their broker, it has to be repaid within a stipulated period, with interest added. In case the investor fails to repay the loan, the securities that are invested in through the MTF are liquidated by the broker.
Holding of Assets
The broker gives investors the service of a margin trading facility to buy or invest in certain securities, say stock. The broker is essentially giving investors a loan to buy or invest in the stock. The investor does not own the stock or the security as it is bought on a loan from the broker. Until the loan is repaid by the investor, the broker holds the assets or securities bought on a margin (i.e. they are pledged to the broker).
Leveraged Services
When you buy shares on a margin in the share market, you are availing of a leveraged financial product as you are purchasing securities that are beyond your buying power. This translates to the fact that your earnings and your losses are potentially amplified.
Limitations
As the margin trading facility is a leveraged service or product, it is offered to invest in a limited group of stocks. SEBI or the Securities and Exchange Board of India has identified those securities on which you can avail of the MTF.
Make the Most of an Investment Opportunity
The margin trading facility allows investors to make the most of trading options and gives more traders access to the markets. Investment in the share market is more accessible through this facility than ever before, but investors should check with individual brokers about certain terms and conditions regarding say, the capping of funds that can be borrowed through the MTF.
