Margin trading facility, or MTF, is one crucial offering from brokers. MTF allows you to amplify your buying power without tying up large amounts of your capital. If you are short on funds, you can borrow additional money from your broker through MTF by paying a fraction of the total trade value.
In return, you need to pay an interest on the borrowed amount. MTF is akin to a loan on which you need to pay an interest. Read on to learn about the five benefits of using the margin trading facility for stock market trading.
5 Advantages of Using MTF
Enhances Your Buying Power
This is the most significant advantage of MTF. Margin trade boosts your purchasing power by several notches. With MTF, you can take larger positions in the market without having to have full capital upfront. This is helpful if you have limited funds but don’t want to miss a promising opportunity.
Let’s see how MTF boosts your buying power. Suppose you have ₹50,000 with you, and you want to invest in a stock trading at ₹1,000 per share. With your money, you can buy only 50 shares. Now, if you borrow ₹1 lakh from your broker through MTF, you can buy 150 shares. MTF from brokers like HDFC SKY amplifies your buying power up to 4X.
Opportunity to Capitalise on Market Opportunities
Stock markets are dynamic, with opportunities emerging in a flash. Your ability to act swiftly can make a significant difference between profit and loss. MTF ensures you don’t miss out on promising market opportunities due to lack of funds.
Be it a sudden dip in a stock you believe will recover or a positive market sentiment following a major announcement, MTF gives you the financial backing to lap on it immediately. The real-time responsiveness from MTF can go a long way in maximising investment returns.
Suppose a stock in your watchlist drops by 10% due to a change in market sentiment. However, you know the company’s fundamentals are strong, and the stock will rebound sometime in the future. With MTF, you can use the opportunity of temporary price drops to buy the stock at a discount.
Potential for Returns on Your Investment
MTF not only enhances your buying power but also potentially increases your chances of earning returns on your investment, especially when the stock’s performance is expected to do good. Let’s understand it with an example.
Suppose you have ₹10,000 and want to purchase shares of a particular company priced at ₹100. Without MTF, you can buy 100 shares, and if the stock price rises to ₹120, your profit is ₹2,000 (₹20 X 100 shares). However, you decide to use MTF and borrow ₹20,000 from your broker. With additional funds, you can buy 300 shares of the same stock, and if the stock price rises to ₹120, your profit stands at ₹6,000 (₹20 X 300 shares).
Offers the Opportunity to Diversify Your Portfolio
MTF gives you the opportunity to diversify your portfolio without the need to liquidate your existing investments. Diversification is a fundamental investing principle that helps reduce risk and offers portfolio stability. However, diversification comes at a cost. In other words, you need sufficient funds to invest in different asset classes, balancing risk and rewards. MTF offers you the financial backing to diversify.
For example, you can use MTF to invest in stocks, derivatives, and commodities, among others, as per your goals and risk tolerance. If you have a significantly high-risk tolerance, you can opt for MTFs to invest in derivatives and commodities, albeit cautiously.
Greater Flexibility in Portfolio Management and Benefit from Corporate Actions
Through MTF, you can gain greater flexibility in managing your portfolio. It allows you to adjust your portfolio quickly depending on market trends without requiring you to sell your term holdings.
For instance, if you find a sudden trend indicating potential growth in the IT sector, you can use MTF to take your position in IT stocks without selling or disturbing other holdings – while preserving your original investment strategy.
That’s not all. If you hold stocks under MTF positions and the company declares dividends, you become eligible to receive them. The dividends received can act as an extra source of income.
Some Considerations While Using MTF
While MTF offers a range of advantages, you need to use it with prudence and be aware of these things:
- Interest rates: MTF isn’t free, and you need to pay interest on it. If you don’t manage it well, this can eat away at your profits. However, HDFC SKY offers MTF facility at zero interest rate for the initial 30 days.
- Can Magnify Losses if Investment Doesn’t Perform Well: If investments made through MTF fail to perform well, MTF can magnify losses significantly.
- Can Result in Margin Calls: If your holdings lose value and go below a certain threshold, your broker can initiate a margin call that requires you to deposit more money. If you fail to do so, the broker has the right to liquidate your holdings and recover the amount.
Conclusion
MTF can be a useful tool if you are confident, disciplined, and willing to take calculated risks when trading. Prudent use of MTF, through a mobile trading app, can boost your buying power and profits. That said, it’s equally essential to have a sound risk management strategy to make the most of this facility.
HDFC SKY offers an MTF facility at a competitive interest rate with zero charges for 30 days. Open demat account with HDFC SKY and use MTF to potentially boost your gains.
