Margin Trading Facility
Updated on March 11, 2023
Margin Trading Facility (MTF) is a facility provided by a broker to the client for buying shares and securities where only a small amount or fraction is charged to the client out of the total transaction cost, which is called a ‘margin’. The margin can be in the form of cash or shares as collateral/security and in this transaction, the broker funds the balance amount. It can also be termed as buying shares or securities through leverage.
Features of Margin Trading Facility
Features of Margin Trading Facility are:
1. The margin trading facility is offered against a collateral and the balance amount provided by the broker is a loan to the client for buying shares/securities.
2. MTF is an agreement entered into by the client and broker, which ensures that the client is aware of the risk and rewards.
3. SEBI and Stock Exchanges monitor the securities eligible under MTF and also prescribe the required margin (cash or shares as collateral) from time to time.
4. MTF facility can be provided by large corporate brokers only, as per SEBI regulations.
Benefits of Margin Trading Facility
Benefits of Margin Trading Facility for Investors are:
1. MTF is ideal for investors without enough capital but who expect to benefit from the short-term price movement.
2. Investors can easily utilize securities available in their Demat account for enhancing profits.
3. Margin Trading Facility is tightly monitored by SEBI and exchanges and thus offers regulatory oversight.
Risks of Margin Trading
Risks of Margin Trading are:
a) The losses arising from MTF can be as high as or even more than the expected profits in case the prices do not move as envisaged.
b) A broker has the right to liquidate investor’s assets in case the required margin levels are not maintained.