Increased Purchasing Power: Margin Trading Facility enables traders to increase their purchasing power. It addresses the challenge of insufficient capital by allowing investors to take larger positions with only a fraction of the trade value paid upfront. By allowing investors to borrow funds to purchase securities, opens up opportunities to engage in bigger trades than otherwise possible with their available cash alone.
Margin Trading Facility improves the possibility of profits as well as empowers traders to capitalize on promising market opportunities without having to liquidate their current holdings. For example, assume you want to place a trade for Rs 30 lakh (buy 2,000 quantities of XYZ Ltd. for a share price of Rs 1,500). You will need to maintain a margin of Rs 6 lakh against broker’s 80% funding of Rs 24 lakh. Now assuming the stock moves up by 20%, your profit is a whopping Rs 6 lakh. But if you had not taken the funding, then you would have bought only 400 shares and your profit would be limited to Rs 1.20 lakh.
Enhanced Flexibility: Conventional trading often requires investors to have substantial liquid funds to execute transactions. However, Margin Trading Facility provides traders the flexibility to leverage opportunities even with limited cash reserves. This adaptability empowers investors to promptly react to market movements and take advantage of short-term trends.
Efficient Allocation of Capital: To hold Margin Trading Facility positions you only require up to 20% of your income, leaving a surplus of 80% of your income. With this surplus amount one can allocate this capital across various investment opportunities simultaneously, it can also provide a buffer for emergencies.
Higher ROI. Lower Taxes: Margin Trading Facility helps you invest a higher amount, which increases your return on investment (ROI). Say you want to buy stocks worth Rs 1 lakh. With MTF, you will need only Rs 20,000 to take this position (the balance Rs 80,000 will be funded by the broker). Assume the stock appreciates and your position is now worth ?1.50 lakh, giving you a profit of Rs 50,000.Without MTF, you would have to shell out the entire ?1 lakh, which means your ROI would be 50%. However, with MTF, you only had to bring in Rs 20,000, so in this case, your ROI is 250%. Assuming this position was held for 60 days, then @12% interest p.a., total interest payable would be Rs 1,578. Deducting this from the ?50,000 profit, would still give you an ROI of 242%.Additionally, you can save tax too. Without MTF, you would have to pay STCG @ 30% i.e., Rs 15,000. However, with MTF, you can offset interest payable of Rs 1,578 and your STCG will be calculated on Rs 48,422 (Rs 50,000 – Rs 1,578) which comes to R 14,526.
So, with MTF, you not only increase your ROI but also reduce your tax outflow.
Benefit from Corporate Actions: If you own stocks under Margin Trading Facility positions and the company declares a dividend, you’re eligible to receive dividend payouts, giving you an extra source of income.
Cost-Efficiency: Leveraging Margin Trading Facility may present a more financially advantageous choice in comparison to other financial options like personal loans or credit lines. Margin trading commonly provides impressive interest rates, rendering it appealing for traders seeking to optimize their gains while minimizing borrowing expenses
In conclusion, Margin Trading Facility presents countless benefits to traders, including increased purchasing power, greater flexibility, diversification opportunities, and potential for higher returns. That being said, it is crucial for traders to exercise caution when engaging in margin trading and adhere diligently to risk management principles to minimize possible limitations.
(The author Sunny Ahuja is Sr.Vice President- Head Products & Platform, m.Stock by Mirae Asset. Views are own)