Margin Trading Facility- Definition, How MTF Works, Advantages, and Risks (2024)

Margin Trading Facility (MTF) is a product approved by exchanges that allows you to buy stocks by paying only part of the total value. The broker funds the remaining amount and charges interest on this loan.

How Does the Margin Trading Facility Work ?

Let's say you have Rs 100 but want to buy shares worth Rs 500.

Here's where the Margin Trading Facility (MTF) steps in.

Typically, you need to provide 20% of Rs 500 as your initial investment, which amounts to Rs 100. However, depending on the stock, this percentage can increase. For our example, we'll stick with 20%. The broker then funds you the remaining Rs 400 (80% of Rs 500). With MTF, you can now purchase Rs 500 worth of shares with just Rs 100. It's important to note that the stocks must be verified (pledged with the broker) per SEBI guidelines to purchase under MTF.

Potential Gains and Risks

If the Share Price Increases

Suppose the share value rises to Rs 550. Your profit would be Rs 50 (Rs 550 - Rs 500). Since you invested Rs 100 of your own money, your return on investment is 50% (Rs 50 profit on Rs 100 invested).

If the Share Price Decreases

Conversely, if the share value drops to Rs 450, your loss would be Rs 50 (Rs 500 - Rs 450). With your initial investment of Rs 100, this results in a 50% loss.

While this leverage can lead to higher returns, it also increases the risk of significant losses if the share price falls.

By understanding and utilizing the Margin Trading Facility, you can make the most of limited funds and maximize your investment opportunities in the stock market. However, it's crucial to be aware of the associated risks, including the possibility of magnified losses and interest costs, and to use this responsibly.

How to Use MTF on Groww?

Step 1: Choose the stock you want to buy.

Step 2: Switch to the "MTF" option on the order cart.

Step 3: Agree to the Terms & Conditions by marking the checkbox, then click on "Activate MTF."

Step 4: Enter the quantity of shares you wish to purchase and click "Verify to buy."

Step 5: You will be redirected to the CDSL portal where you need to verify (pledged with the broker) the order by entering the OTP received on the registered mobile number.

Step 6: You're all set! Your MTF transaction is complete.

Note: We are gradually rolling out MTF to users, and it will be available to everyone soon.

Advantages and Disadvantages associated with MTF

Listed down are some of the advantages and risks associated with Margin Trading Facility-

Advantages of Margin Trading Facility (MTF)

Increased Profit Potential: With MTF, one can potentially increase returns because of access to more capital. At the same time, there’s also a possibility to incur losses.
Higher Buying Power: With MTF, investors have greater purchasing power as the funding is readily available for purchasing the stock, enabling you to purchase more with their available capital.

Risks of Margin Trading Facility (MTF)

Higher Losses Risk: While MTF can boost profits, it also means if the stock price falls, losses can be bigger than what you initially invested, putting your money at greater risk.
Minimum Balance Requirement: You must maintain a minimum balance in your trading account. In case your stock goes into a loss or the minimum margin requirement increases, you will be asked to deposit funds.
Liquidation: Liquidation is the process of closing your positions by the broker. If the value of your investments drops and there is a margin requirement and you don't add the required funds on time, your broker will automatically square off your positions. Any losses arising hereof shall not be the responsibility of the broker.
Interest Costs: Borrowing money through MTF comes with interest costs, which can eat into your profits and increase your overall expenses. These costs can accumulate over time, especially if you hold onto MTF positions for an extended period.

It's essential to understand the risks associated with MTF, including the possibility of higher losses, minimum balance requirements, liquidation risks, and interest costs. Margin Trading Facility can amplify both profits and losses, and improper use can lead to significant financial strain. Therefore, approach MTF with caution and clear investment goals.

To manage these risks effectively and maximize your investment opportunities, follow these:

Stay informed about market trends and indicators.
Diversify your portfolio to spread risk across different stocks.
Monitor your investments closely and regularly check balance requirements.
Use funding wisely and avoid excessive borrowing.
Have a well-defined exit strategy with predetermined profit targets and loss limits.
Please read and understand the MTF Terms and Conditions.

By taking these steps, you can leverage MTF while minimizing potential downsides and enhancing your overall investment experience.