What is MTF in the stock market: Full Form, Usage & Margin Trading Explained

With MTF, you can buy more shares for less money. It's like getting more money from your broker so you can trade larger quantities.

Example: 

Let's see how Aman uses MTF to grow his small investment, but with bigger risks!

Aman finds that his initial investment of ₹5,000 is insufficient. His broker doubles his capital to ₹10,000 by using MTF to provide an extra ₹5,000 (1:1 margin). By investing ₹5,000 of his own money, he can buy twice as many shares. This increases both his potential gains and losses.

MTF helped Aman buy more shares. He knows that more wealth means more risk.

Table: 
 

This is the difference between Aman's investment with and without MTF:

This table shows that MTF doubles Aman's shares. But keep in mind, doubling the shares also doubles the risk!

MTF doubles your buying power. But keep in mind, gains and losses grow larger when the market shifts! Savvy traders use MTF wisely. It’s like wearing a seatbelt when driving fast.

Complete Form of MTF in the Stock Market

MTF stands for Margin Trading Facility. It allows traders to borrow funds from their broker to purchase additional shares.

Now that you understand MTF, it’s important to find Indian brokers with the lowest interest rates for MTF. This blog aims to teach you about MTF and broker rates. We want to empower you with helpful knowledge.

• Zerodha charges a flat 0.04% daily (14.6% p.a.)
   
• ICICI Direct has variable rates ranging from 0.026% to 0.049% daily. This means annual rates vary between 9.69% and 17.99%, depending on the client's plan.
   
• Groww maintains 0.041% daily (14.95% p.a.)
   
• Kotak Securities starts at 0.026% daily (9.75% p.a.), with potential variations.

Now you know how much MTF each broker charges. According to this list, these brokers are among the best in India. Next, we will discuss how MTF work in this blog.

How Does MTF (Margin Trading Facility) Work?

MTF lets you buy more shares than you can afford. You do this by borrowing money from your broker. It raises your risk and also affects your purchasing power.

Example: 

This example shows you how Akskay trades MTF.

Akshay could buy 100 shares of XYZ Ltd. for ₹200 each with ₹20,000. He doubles his investment to ₹40,000 by borrowing an additional ₹20,000 through MTF. He now buys 200 shares, which could double his profits but also double his risk if prices decline.

MTF doubled Akshay's investment to 200 shares. But he knows that market swings could also double his profits or losses.

Two Possible Outcomes:

1. Stock Price Goes Up (Profit)
 

• If XYZ Ltd. rises to ₹250 per share:
   
  • Value of 200 shares = ₹50,000 (200 × ₹250).
     
  • Pay back ₹20,000 to the broker.
     
  • Akshay's total sum is ₹30,000 (₹50,000 - ₹20,000).
     
  • ₹10,000 is the profit (₹30,000 - his initial ₹20,000).

2. Stock Price Falls (Loss)
 

• If the share price of XYZ Ltd. falls to ₹150:
   
• 200 shares are worth ₹30,000 (200 × ₹150).
   
• Pay back ₹20,000 to the broker.
   
• The total amount for Akshay is ₹10,000 (₹30,000 - ₹20,000).
   
• ₹10,000 (₹20,000 - ₹10,000) is the loss.

Table: 

This is how Akshay's investment is impacted by MTF use when stock prices rise or fall.
 

MTF doubles potential gains and losses; although gains appear larger, risks increase proportionately.

Continually assess your risk tolerance before using an MTF. It can help you build wealth faster. But if the market goes down, you might face bigger losses.

Benefits of MTF (Margin Trading Facility)

MTF allows traders to borrow funds from their broker to purchase additional shares. It increases profits, but it needs to be used carefully.

Example:

Let's examine how Akash doubles his ability to buy ABC Ltd. stock using MTF.

Akash could only buy 100 shares of ABC Ltd. for ₹500 each with ₹50,000. His broker doubles his investment to ₹1,000,000 by lending him ₹50,000 through 1:1 MTF. He now buys 200 shares. This could double his returns, but it also means he faces twice the risk of losing money.

MTF doubled Akash's shareholding, but this also means that his gains or losses will double!

Key Benefits of MTF for Akash

1. Bigger Investments with Less Capital
   • Own money: ₹50,000, and Total investment: ₹1,00,000 (double the shares).
      
2. Higher Profit Potential
   • If ABC Ltd. rises to ₹600 per share:
     • Without MTF: Profit = ₹10,000 (100 shares × ₹100 gain).
     • With MTF: Profit = ₹20,000 (200 shares × ₹100 gain).
        
3. Flexibility in Trading
   • Akash can take advantage of market opportunities without waiting to save more money.
      
4. No Need for Extra Collateral
   • The shares bought act as security for the borrowed amount.

Table:

This table illustrates how MTF magnifies Akash's investment's possible gains and losses.
 

MTF doubles your exposure; although gains may be greater, losses are also twice as painful!

Important Notes:

MTF boosts your trades, but there are more risks, expenses, and regulations to adhere to.

MTF doubles Akash's possible gains or losses. Brokers may force-sell if prices fall (margin call), and borrowed funds are subject to interest (e.g., 12% p.a.). Great for quick transactions that seize market chances and cut interest costs. 

Move sensibly: Profits can be increased quickly with MTF, but costs and losses can be equally severe.

For traders who are aware of risks and seek to optimise opportunities, MTF is helpful.

Risks of MTF (Margin Trading Facility)

MTFs allow you to trade using borrowed funds, but if you don't use them carefully, you could lose a lot of money. It can harm your trading account if you don't know the technical and fundamental analysis in the stock market.

Example: 

Piyush doubles his trade with MTF,  but is it wise to rely on market rumours?

Piyush buys 200 XYZ shares at ₹300, doubling his ₹30,000 to ₹60,000 through MTF. He risks larger losses if prices decline. This can occur if he trades based on rumours without proper research. He may also face margin calls and interest charges. 

Blind trading with borrowed funds can turn a slight loss into a big disaster; always trade responsibly.

What Goes Wrong?

1. Stock Price Falls
   • XYZ Ltd. drops to ₹200 per share (₹40,000 total value).
      
2. Forced Selling (Margin Call)
   • The broker asks Piyush to add more money or sell shares to recover losses.
      
3. Final Loss
   • After repaying ₹30,000, Piyush is left with ₹10,000 (₹40,000 - ₹30,000).
   • Total Loss = ₹20,000 (₹30,000 initial - ₹10,000 remaining).
      

Table: 

Watch Piyush's ₹30,000 MTF trade go wrong as the stock decreases 33%.
 

Two-thirds of Piyush's capital was lost in a 33% decline, showing that borrowed funds increase losses more quickly than gains.

Piyush lost two-thirds of his capital due to a 33% decline. This shows that borrowed funds can increase losses faster than they boost gains.

Key Risks of MTF:

MTF trading carries hidden risks that can turn against you in a short period.

MTF raises risks:

• Interest cuts into profits.
• Falling markets offer no safety.
• Losses can surpass your capital.
• Margin calls may lead to forced sales during dips.

Leverage requires prudence because there are serious drawbacks to the potential benefits.

The risks include margin calls and interest costs. They can completely wipe you out, even with larger bets from MTF.

Lesson: Never use MTF without the necessary understanding. Don't trade more than you can afford to lose.

Conclusion

MTF can magnify both gains and losses, as traders like Piyush and Akash have shown. Be disciplined when trading. Please keep it to temporary agreements. Conduct in-depth research. Keep an eye out for dangers like interest charges and margin calls. 

Remember that borrowing doubles profits and losses. Beginner traders should gain some experience with their capital before using an MTF. Since too much leverage can cause your account to go bankrupt, risk management should always come first. 

Make smart trades, stay within your limits, and refrain from taking on more risk than you can afford to lose. Smart trading aims for long-term survival, not just higher profits. Use MTF practically, or wait until you're ready.

FAQs

Can I lose more money than I invest with MTF?

Yes, if the stock price drops a lot, your losses can go beyond what you invested. You still need to pay back the borrowed amount and interest.

What happens if I can’t repay the borrowed money?

The broker can sell your shares to recover their money, even if it means selling at a loss. This is called a "margin call."

How long can I hold MTF trades?

Most brokers allow MTF trades for a short period, usually a few days to weeks. Holding longer means paying more interest, which eats into profits.

Can I use MTF for any stock?

No, brokers allow MTF only for certain stocks (usually liquid and large-cap stocks). Check with your broker for the approved list.

What’s the difference between MTF and a loan?

MTF is specifically for trading stocks, while a loan can be used for any purpose. MTF also has stricter repayment rules and higher risks.

Can I convert an MTF trade to a normal trade?

Some brokers allow this by paying back the borrowed amount. Check with your broker for their specific rules.

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