Margin Trading Facility (MTF) offers leverage to the traders in trading allowing them to increase the potential of their investments in financial assets. However, using the MTF excessively or beyond your financial capabilities can result in huge financial losses.
Though, the optimal use of such a facility will help you to achieve your investment goals while enhancing your financial health with a high rate of returns on your investment. Here you need to understand how should utilize this facility smartly so that you can avoid the impact of its consequences and maximize the benefits in terms of getting the best returns on your investments.
What is a Margin Trading Facility?
Margin trading facility is the type of leverage offered by the broker and exchange allowing you to trade much more than the funds you have. Usually, this kind of leveraging facility is offered for intraday or short-term trading. While the broker or exchange charges the interest on such funds or facility of leveraging to traders.
Based on the broker or exchange you can get multiple times leverage to utilize the funds for trading. However, to take advantage of MTF you need to deposit a certain amount as upfront money in your trading account. This amount acts as an initial margin that is used as a collateral security in case of volatile market conditions or when underlying security moves against expectations.
The Benefits of MTF in Trading and Investments
High Purchasing Power: The MTF allows the traders to borrow money multiple times the funds they have. It increases their purchasing power allowing them to enter into large trade positions even with less funds.
Large Trade Position: With the margin facility in trading you can enter into a larger trade position, even though you don’t have enough funds. This kind of leverage allows the traders to trade into high-value assets that would be not possible due to lack of sufficient funds.
Better Profitability: When you get the leverage, your actual amount of investment is very low, but by earning profits on the margin-backed funds, your profitability ratio on your actual fund invested by you makes such profitability very high due to leveraging on such investments.
Flexibility of Trades: Using this margin facility you trade in both types of market situations bullish and bearish. You can use the MTF for long positions as well as for short positions to take advantage of either side short-term movement in the price of the underlying security.
Suitable for Short-term Trading: This can be more useful only in intraday and short-term trading as allowing the traders to take advantage of market swings and volatility in the price of the underlying security. It is a highly liquid investment that helps traders to use their funds in other trading opportunities.
How to Leverage Your Investments with MTF?
Utilizing the MTF to leverage your investment and maximize the actual rate of returns trading in such short-term instruments can help you improve your overall returns on such investments. You need to understand its various aspects so that you can make better use of the MTF allowed by the brokers and exchanges.
Choose the Right Instrument
One of the most important things while using the MTF is to pick the right investable instruments that can give you the highest leveraging power at minimum cost with the lowest risks. Yes, you can use multiple underlying securities to trade with MTF like stock futures or options, index futures or options, currency or commodities futures. Pick the right one as per your trading scope and risk profile.
Avoid Excessive use of MTF
Some traders start using the MTF excessively; it will not only increase their cost of borrowing but also increase the chances of losses due to trades in unfavourable market conditions. And use the margin up to that time that much you can afford to pay when the market does not move as per your expectations. For excessively using the MTF, you will be frequently asked for maintaining the margin call by your broker.
Evaluate the Cost of Borrowing
Before you use this facility, you need to evaluate the interest or fees charged by your broker on such MTF. However, some of the brokers charge only annual fees for providing this facility and few of them charge a rate of interest on the amount you use as a margin in your trading. So, check the interest rates and other charges to optimize your cost of borrowing that can affect your rate of return on such investments.
Timely Liquidate Trade Positions
When you trade using such a margin facility don’t carry your trade positions for longer days, it will not only increase your cost of borrowing but also increase the chances of incurring the losses if market moves against your expectations. Hence, timely exit or profit booking is very important to liquidate your trade positions and release the funds used as a margin.
Avoid Overtrading in the Market
Some traders are obsessed and unnecessarily trade in the market with multiple trades even if the market condition is not favourable. Overtrading and with funds used from the margin facility will not only increase your cost of the transaction but also affect the level of margin you can be allowed for trading. Hence, keep a balanced trading approach to the MTF for limited trading practices.
Trade with the Right Service Provider
Different brokers and exchanges provide different margin ratios, which means how much margin you can get on the funds available to you. Some of the brokers offer only 2 times margin while few of them provide up to 4 to 5 times MTF to their regular customers. However, the limit of margin can differ on types of trading and underlying security. For intraday you can get a higher margin, similarly in high-risk security or underlying security with high implied volatility get the low MTF due to risk of unexpected price change.
Read About the Margin Penalties
When you use the MTF, every day during or the end of the trading session, your broker will ask you for a margin call to maintain the margin ratio as per the change in the value of your trade position due to a change in the price of the underlying security. However, if you do not maintain the margin, your trade position will be squared off or a margin penalty will be imposed by the exchange on your trading account. Hence, make sure to trade wisely to avoid such penalties and make the best use of leverage in trading.
Summing-up
MTF in trading or short-term investing offers a leveraging to multiply your fund’s earnings into many folds by investing a few portions of it. You just need to arrange sufficient funds to maintain the margin calls and you can enter into large trades that would be not affordable for you if such margin facility were not available. It increases your profitably and rate of earnings on such investments.
However, trading with the right risk management is very important to ensure the returns and avoid the impact of major risks due to unfavourable market conditions. Hence, proper research and the use of the right tools and techniques are very important to make your trade successful.
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