Suppose you spot a buying opportunity in a stock. However, you only have Rs. 10,000 in your trading account..
What if you could borrow funds from your broker to buy more quantity of that stock?
This is where the concept of a Margin Trading Facility (MTF) comes into use.
Margin Trading Facility (MTF) is like borrowing money from your broker in order to buy more stocks than you could with just your own money!
It helps you make gains in the market without using all your capital.
For example, if a trader has Rs. 10,000 as his own capital. Then with the help of a margin trading facility, they can take a position worth Rs. 50,000 in the stock market.
Investors often use margin trading during the trending market when they anticipate strong upward or downward movements in stocks. Leveraging positions in volatile markets can be risky.
In this blog, we will discuss the workings of MTF, its advantages and some important risk management strategies-
How Margin Trading Facility Works?
Suppose you want to buy 100 shares of Reliance Industries (RIL) at a stock price of ₹1,216 per share. The total value of the trade would be ₹1,21,600 (₹1,216 × 100). With Zerodha’s Margin Trading Facility (MTF), you only need to pay a margin requirement of 25%, which amounts to ₹30,400.
The remaining ₹91,200 is funded by Zerodha as a loan. This allows you to take a delivery position worth ₹1,21,600 while investing only a fraction of the total amount, effectively leveraging your capital.
Let’s discuss how this facility works –
- You select “Buy using MTF” on Zerodha’s Kite platform while placing an order. You pay the required margin (₹30,400 in this case). Zerodha funds the remaining amount (₹91,200).
Interest Charges:
0.04% per day on the funded amount (₹91,200).
Daily Interest = ₹91,200 × 0.04% = ₹36.48
If you hold for 10 days, total interest = ₹36.48 × 10 = ₹364.80
Brokerage Charges:
0.3% or ₹20 (whichever is lower)
Since 0.3% of ₹1,21,600 = ₹364.80, the lower charge of ₹20 applies.
Pledge Charges:
₹30 per ISIN per pledge
Since RIL is one ISIN, pledge charge = ₹30
Square-off Charges (if applicable):
If Zerodha forcefully squares off your position, a ₹50 + GST charge is applied per position.
Other Charges: Stamp duty, government charges, and statutory fees may also apply.
- If the stock price falls and your margin drops below the required level, you may get a margin call from Zerodha. If you don’t add funds, your position may be squared off to recover the borrowed amount.
- You can sell the stock anytime, repay the borrowed amount, and keep the profit/loss.
Comparison between Margin Trading vs. No Margin Trading (Regular Trading)
When trading without margin (No Margin Trading), you need to pay the full amount upfront to buy stocks for delivery. For example, if you want to buy 100 shares of Reliance Industries (RIL) at ₹2,500 per share, you must invest the entire ₹2,50,000 from your own funds.
However, with Margin Trading Facility (MTF), you only need to pay a fraction of the total amount, while the broker (Zerodha) funds the remaining amount.
If Zerodha requires a 25% margin, you only need to invest ₹62,500, while ₹1,87,500 is borrowed from the broker. This allows you to take larger positions with limited capital, potentially increasing returns.
However, margin trading also carries risks, such as daily interest charges on the borrowed amount as well as margin calls if the stock price falls significantly.
Without margin trading, there are no interest charges, and you have full ownership of the stock.
Advantages of Margin Trading Facility
Here are some of the advantages of using a Margin Trading Facility-
1. Used for Earning Short-Term Profit
Traders who are looking to earn profits on short-term price movements can use the margin trading facility. Since it allows increased exposure, traders can benefit from minor stocks.
2. Leverage Market Position
Leverage is the main reason why investors engage in margin trading. MTF lets traders make bigger trades even if they have little money. It helps them use borrowed funds to increase their market position.
3. Enhances Liquidity Management
By using MTF, traders can also free up their capital for other investments while still maintaining market exposure. This helps with better fund allocation and increased participation in multiple trades.
4. Potential for Higher Returns
Since margin trading allows larger positions, profits from successful trades can be much higher than those made using only one’s own money. However, remember that this facility also comes with higher risks.
Points to Remember While Using Margin Trading Facility
Before using the Margin Trading Facility, here are some points to remember-
1. Research before using this facility!
One should analyse market trends – whether it is trending or volatile, stock performance, technical as well as fundamental indicators before using the margin trading facility.
2. Risk Management Plan
Since margin trading involves risk, traders should also set proper stop-loss levels and try to diversify their portfolios in order to reduce potential losses.
3. Monitor Your Trades Closely
Volatile price fluctuations can trigger margin calls. Due to this, traders need to deposit extra funds. Active monitoring of positions is important to avoid stock liquidation.
4. Costs Involved
Also, MTF comes with several charges such as interest on borrowed funds, brokerage fees, and pledging costs such as –
Brokerage Charges
- Higher than regular trades; varies by broker.
- Some charge a percentage of trade value, others have flat fees.
- Check your broker’s MTF policy for exact rates.
Interest Charges (Financing Cost)
- The main cost of MTF—is you’re borrowing money to trade.
- Interest rates depend on broker policy, market conditions, security type, and debit balance.
DP (Depository Participant) Charges
- Similar to normal delivery trades, it varies by broker.
Transaction Charges (Exchange & Clearing Fees)
- Small fees are applied to all trades by stock exchanges.
Stamp Duty
- Government tax on transactions, usually a small percentage.
Other Possible Charges
- Delayed payment fees if you miss margin payments.
- Margin call fees if your margin drops below the required level.
- Hidden charges may apply based on broker terms.
5. Avoid Overleveraging
While higher leverage offers higher potential returns, it also increases risks. Traders should avoid overleveraging, especially when the market is volatile.
Conclusion
Margin Trading Facilities are for traders who want to maximize their market exposure and short-term profits Traders should use MTF only when they have a well-defined strategy and are prepared for potential losses. They should always assess their risk tolerance before opting for this facility.
While margin trading can increase profitability, it should be used carefully, keeping risk management strategies in place. If you’re a beginner, then consider starting with a small margin and gradually increasing exposure as you gain experience.
Also Read: All 35 Candlestick Chart Patterns in the Stock Market-Explained
Frequently Asked Questions
1. Is Margin Trading Facility good or bad?
MTF is neither good nor bad—it depends on how it is used. If managed properly, it can double profits. However, excessive leverage without risk management can lead to heavy losses.
2. What are the charges of Margin Trading Facilities?
Charges for MTF vary by broker and include:
- Interest on borrowed funds
- Brokerage fees
- Pledging/Unpledge charges
- Regulatory charges (SEBI fees, GST, etc.)
3. What is a Haircut?
A haircut is the percentage reduction applied to the market value of pledged securities when calculating margin requirements. For example, if a stock has a 20% haircut, only 80% of its value will be considered for margin funding.
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