Margin Trading Facility (MTF) is a service regulated by SEBI (Securities and Exchange Board of India), where a broker lends money to a client for purchasing shares. The shares bought and/or shares pledged by the client act as collateral for the loan.
Margin Trading Facility (MTF) is a service provided by stockbrokers that allows investors to buy more shares than they can afford using their own funds by borrowing money from the broker. In simple terms, it is buying stocks on credit.
How It Works :-
- You want to buy shares worth ₹1,00,000 but only have ₹50,000.
- Using MTF, the broker lends you the remaining ₹50,000.
- You pay interest on the borrowed amount.
- The bought shares are held as collateral by the broker until you repay.
Key Features :-
Leverage :- You get to trade with more money than you have.
Interest Charges :- You pay interest on the borrowed funds.
Collateral :- The broker holds your purchased shares or other approved securities as collateral.
Risk :- If the stock price falls significantly, the broker may sell the shares (margin call) to recover the loan.
Example :-
If you have ₹10,000 and your broker offers 4x margin, you can buy up to ₹40,000 worth of stocks using MTF.
How MTF Works - Step by Step
1. Opening an MTF Account :-
- You need to sign an agreement with your broker (like Zerodha, ICICI Direct, etc.) for MTF.
- Brokers may require additional KYC compliance.
2. Funding the Margin :-
- You pay a margin amount (a percentage of the total trade value).
- The broker funds the remaining part.
3. Buying Shares :-
- You select shares that are eligible under MTF (approved by SEBI).
- Shares are bought in your name but held as collateral with the broker.
4. Maintaining Margin :-
- You must maintain a minimum margin.
- If share prices drop, you may face a margin call (broker asks you to add more funds).
5. Square-Off :-
- You can square off (sell) the position yourself.
- If you fail to maintain margin, the broker may forcibly square off the position.
✅ SEBI Guidelines (As of 2024)
- Minimum margin required 25% of the trade value.
- Brokers must maintain daily reporting of margins.
- Interest rates :- Capped and must be disclosed transparently.
- Only Group 1 securities (liquid and approved stocks) can be traded via MTF.
Example
Let’s say you want to buy 100 shares of Infosys at ₹1,500 each = ₹1,50,000.
- Your own funds: ₹37,500 (25%)
- Broker funds: ₹1,12,500 (75%)
- Interest: Say 12% annually (charged daily)
- You are now trading with 4x leverage.
If Infosys goes up to ₹1,600, you gain more on your ₹37,500 capital.
But if it drops to ₹1,400, the losses are also magnified.
Benefits of MTF
Leverage :- Trade bigger with limited funds
Potentially Higher Returns :- Profit are amplified if the trade goes your way
Ownership :- Shares are in your name (unlike derivatives or futures)
Flexibility :- Can hold the position as long as margins are maintained
Risks of MTF
Margin Call :- Sudden drop in stock prices can force liquidation
Interest Burden :- Daily interest adds to cost, especially for long holding
Limited Stock Choice :- Not all stocks are allowed under MTF
Market Volatility :- Leverage increases risk in volatile markets
Collateral Options
- Cash
- Securities from your Demat account (pledged)
- Mutual fund units (in some cases)
Tax Implications
- Gains from MTF trades are treated like delivery-based trades (short-term or long-term capital gains depending on holding period).
- Interest paid on margin may be claimed as a cost in some trading businesses, subject to conditions.
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