MTF trading facility or margin trading facility is offered by a stock broker where you can purchase shares worth more than you have currently in your trading account. Stock brokers provide you with the extra amount as a loan and charge interest depending on your loan tenure. The amount you need to offer as collateral is called the margin.
For example, you have Rs. 10,000 in your trading account, in normal trading you cannot buy shares with more than that. By using the MTF facility you can buy shares of Rs. 30,000 (if your broker provides 3x margin). The interest rate can go up to 24% per annum depending on your broker.
So, how does the margin you pledge affect your trades? Read below to learn more about pledges in margin trading.
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What Is the Margin Pledge?
In the margin trading facility (MTF), you use your pre-owned stocks or cash as collateral to borrow funds for trading. Here the securities or cash offered as collateral is called margin while the funds offered by the broker are the leverage.
When you avail the MTF facility, your broker will pledge the securities in your demat account. The pledged securities remain in your demat account, but you cannot use them till you pay your borrowings along with interest.
A pledge in margin trading funding (MTF) involves the usage of your pre-owned stocks as collateral to the broker to take part in margin trading. Stock brokers deduct a haircut (%) from your holding value and use it as a guarantee. This haircut percentage depends on the particular stock you are using to pledge.
For example, you have holdings worth Rs. 1,00,000 in your demat account. Let’s assume your broker deducts 25% as a haircut. It means, your broker is keeping Rs. 25,000 for collateral and you will get Rs. 75,000 as margin.
Eligibility of Margin Pledge
These are the eligible instruments that you can use for margin pledge:
- Exchange Traded Funds (ETFs)
- Stocks
- Mutual funds
- Sovereign Gold Bonds (SGBs)
However, there are charges applicable for both pledging and un-pledging in the margin pledge facility. It varies among different stock brokers.
Additional Read: Why Should I Invest in Sovereign Gold Bonds (SBGs)?
Overview of Margin Trading Funding Facility
Before knowing the effects, you should first understand margin trading. In the MTF trading facility, you can get extra balance to buy shares against your trading account balance or stock holdings. This is a type of loan that your broker provides you and charges interest according to loan tenure. Additionally, brokers can take other fees to provide this facility.
Impact of Margin Pledge on Your MTF Position
These are some most significant impacts of margin pledge on your MTF position:
- Leverage:
By using a margin pledge, you can increase your purchasing power to trade stocks by borrowing funds from your broker. It can increase both losses and gains in your MTF position. If you take higher leverage from a margin pledge, you can exponentially increase your profits. However, depending on market movements, it can also lead to quick and massive losses.
- Risk:
With a margin pledge, you can take a larger position in your trades. However, it significantly increases the risk in your MTF position. It is very important to manage your risks carefully. Otherwise, it will create significant losses in your overall portfolio if the market moves against you.
- Margin Calls:
When using a margin pledge, you need to maintain a minimum balance in your margin account. If the value of your pledged equities goes below the maintenance margin, the broker will issue a margin call.
When this happens, you have to fix this problem either by adding cash to your MTF account or by selling your securities. If you do not address the margin call within the given time, your broker will square off your positions by selling off your securities to recover the debt and predetermined interest.
- Financial Stability:
If you want to avail this facility, you should be very careful with your financial stability. A part of your holdings stays locked in the margin account; additionally, you may have to pay more to cover margin calls. All of these could affect your finances unless you have sufficient surplus cash. You could also suffer substantial losses if you take the wrong positions.
Things to Remember While Using Margin Pledge
These are the things that you should keep in mind when you are using margin pledge:
- Your broker can change your margin amount daily. If the value of your securities (only pledged securities) falls, your margin amount will decrease. The opposite will happen if the price increases.
- Your trading margin under the MTF facility will depend on the last trading value or the previous day’s closing value (whichever is lesser) of pledged securities.
- You will only get a certain margin after deducting a haircut from its value. For example, you are pleading a share with a value of Rs. 10,000 and your broker is keeping a 25% haircut. Then, you will get Rs. 7,500 under a margin pledge.
Additional Read: Margin Trading Tips & Strategies for Beginners
Summing Up
The MTF trading facility is quite convenient for advanced traders as it allows them to increase their purchasing power without paying additional cash. However, you should be very careful if you are availing this feature. Read all the conditions (especially interest rates, charges, etc.) carefully before pleading your securities.
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Frequently Asked Questions:
Yes. You have to pay the interest on your loan amount. Additionally, you have to pay a fee for both pledging and un-pledging of securities. This charge typically depends on your broker.
No. You cannot withdraw the pledge margin you have received by pleading liquid mutual funds and stocks.
It depends on your broker from where you are using the MTF facility. However, you have to pay an interest on your margin until you unpledge those securities.
In certain cases, you may receive dividends and in some cases not. It is better to discuss it with your broker to know about their exact policies.
