Margin Trading Facility with 4x Leverage

Margin Trading Facility (MTF) is one of the most unique features in financial markets to enjoy the high credit of trading with low funds for entering into high-value trades to enjoy high profitability. Nowadays, most of the brokers offer the MTF to their clients helping them to achieve their investment goals.

Depending on the capability of broker and eligibility of investors or traders, the leverage in the MTF is offered with a certain amount of interest charged for funds offered as a short-term loan. You need to understand this margin trading concept to make better use of such facility. Hence, we are going to discuss about the MTF with 4x leverage and why it’s very popular among the brokers.

What is a Margin Trading Facility?

Margin Trading Facility or MTF is a kind of short-term credibility facility offered by the broking houses to their clients to enter into a trade position with a trade value higher than the actual funds they have deposited into their trading accounts. In simple words, you can buy shares with high trade value by depositing a few portions of the amount as margin money to avail this facility of MTF.

How Does Margin Trading Facility Work?

To avail the MTF you need to open a trading and demat account with your broker. Once you open both these accounts, as per the rules and regulations you need to deposit a certain amount of money into your demat account. Based on the deposited amount and maximum credit your broker can allow you to use the margin for buying the shares. To make you understand better we have explained MTF with an example below.

MTF Example

Suppose you want to purchase shares worth Rs 2,00,000, but don’t have sufficient funds to buy this amount of shares. Here MTF works to help you buy this much amount of shares even with having a low amount of capital. Let’s say your broker is allowing 20% or 5x margin leverage to you.

Here you need to deposit at least Rs 40,000 and the remaining Rs 1,60,000 will be funded by your broker under the MTF providing you the five times leverage to your investments. Here if you gained a profit of 15% on your investments, then you just need to return the borrowed amount with interest to your broker.

If you earn 15% profit, it means you will get a Rs 30,000 return on your total investments, which would be much higher than the actual amount you have used for trading. Suppose you have paid a certain amount of interest at the rate of 15% per annum, still after deducting your broking charges and interest your profitability of Rs 25,000 or more on an actual investment of Rs 20,000 is the result of high leveraging.

How to use Margin Trading Facility?

Margin Trading Facility also used as Pay Later by various brokers allowing their clients to enhance their purchasing power for better profitability. To use this facility you need to have the demat and trading account with your broker with a certain amount of funds deposited into your trading account.

To enjoy this facility you need to request your broker to activate this feature, where you need to accept certain rules and regulations. And you need to maintain daily minimum margins if you enter into more than one-day trade positions like positional trading or futures and options.

Here, as per the change in the price of the security you need to maintain the margins, if you failed to do so, your trade position will be squared off or liquidated without your permission otherwise you might be forced to pay the margin penalty along with interest charges.

Why use a Margin Trading Facility?

One of the best advantages of using the MTF is, that it enables you to trade in higher-value trades with low capital. And these kinds of leveraging amplify the potential of returns on your investments. This kind of leveraging helps small investors or traders to enter into high-value trades with smaller funds.

One of the best reasons for using the MTF is it can improve your overall profitability ratio while trading in the stock market. You can take advantage of short-term movement in the price of various underlying securities and by investing only a few portions of your money back with MTF, your profits on such trades translate into a return on investments into many folds making your return on investment much higher.

How Much Margin you can avail of for Trading?

The brokers offer MTF to their clients as per the rules and regulations of the SEBI and stock exchange. However, there are certain limits of offering maximum margins by the brokers. Hence, most of the brokers offer 4 times margin facility to their clients, while few of them can leverage up to 5x to their clients.

However, depending on the broker’s decisions and their client’s credibility, the margin is offered depending on the market situation and risk prospects in the underlying security. You can easily get the margin to purchase the 4 times the funds you have available to enter into such trades.

Margin Trading Facility with 4x Leverage

MTF with 4x Leverage means you can borrow the funds up to four times the funds you have deposited. It allows the four times leveraging to the traders that would be not possible without MTF. Though, a broker allows the MTF to charge a certain amount of interest on such funds and if the trade position ends with significant profit, it translates a much higher profitability ratio for the traders.

Suppose you want to use MTF with 4x leverage and looking to buy shares 1000 shares of a company worth Rs 2,00,000 with each share price of Rs 200. Here without any MTF, you have to pay the full amount of money to buy the 1000 shares of that company. But if you have the 4x leverage you just need to deposit the Rs 40,000 as a margin money and the remaining Rs 1,60,000 will be covered by your broker.

If the stock prices moved from Rs 200 to Rs 220, it means you can earn a profit of Rs 20,000 by selling 1000 shares with a total value of Rs 2,20,000. Here your actual profit would be Rs 20,000 minus brokerage charges and interest to be paid on the money borrowed as a margin.

However, after paying the brokerage and interest charges if you calculate your returns on the funds you have deposited to enter into this trade, it would be around 50%. While, if the share price goes down, you will be at a loss and you need to pay the interest charges and brokerage on such trades. And here if you want to keep hold of your trade position you need to deposit more money to maintain the margins.

Recommended Read: How Leverage can Boost your Investments

Summing-up

MTF is a short-term credit facility offered by brokers to their clients to borrow funds up to 4 or 5 times the funds available with them for trading. Brokers charge a certain amount of interest to offer the funds as MTF can help you to buy high worth of shares at low cost. However, for more than one-day trade positions you need to maintain the margins on a daily basis or can face a penalty.

Most of the brokers offer 4x margins including providing MTF to their clients, where you just need to deposit 25% of money of total value of the trade. However, trading with the right risk management can only help you to achieve your investment goals. While choosing the right asset and trading as per the market conditions could be one of the best trading strategies to make the best use of MTF in trading.