Investing in the stock market can invoke a range of emotions, from fear and nervousness to elation. While picking and selling the right stocks at the right price and time is an art form as much as it is science, there is an undeniable need for one commodity that underpins all stock transactions – money. Without capital there can be no stock investment.

The unhelpful saying ‘you need money to make money’ holds true in most cases, except when talking about margin trading. On the HDFC Sky MTF app, you can invest up to four times your available capital by borrowing from the broker. You get the benefits of the amplified returns on your amplified investment, with minimal upfront cash or ‘margin’. This article explains how margin trading facility works and how to invest in stocks with minimum margins.

MTF Stock Meaning and Market Margin

In MTF stock trading, the term ‘market margin’ refers to the amount of money an investor needs to put up to make a margin trade. It’s typically a percentage of the stock’s purchase price, allowing you to leverage your investment and maximize returns.

What is Margin Trading Facility (MTF)?

If you want to buy more shares than you can afford with the cash you have on hand, MTF allows you to do just that. Think of it as stretching your money further, by borrowing the rest of the funds from your broker. Here’s how it works:

Say you have ₹25,000 cash to invest. With margin trading, you can buy shares worth ₹1 lakh, borrowing the remaining ₹75,000 from the broker.

Here’s what it means:

Higher returns on investment: You can buy more shares, and earn higher returns overall from your investment. Taking the above example, say the stock value appreciates to ₹1.5 lakh. Without MTF, you would have spent ₹1 lakh, and earned a return on investment of 50%. However, you invested only ₹25,000 which means your return on investment is 2x, or ₹50,000.

Considering you only had ₹25,000 to invest, the stock would appreciate 50% to ₹37,500, earning you a profit of only ₹12,500. With MTF, the potential for returns is amplified.

Flexible and timely investment opportunities: You can maximise wealth-building opportunities by investing at the right time, despite the lack of funds. Say, a stock is speculated to move upwards in the coming days but you do not have adequate funds to invest in it. With margin trading, not only can you invest at the time of your choosing, but also significantly increase the number of shares you buy, maximising your potential profit.

Diversify more easily: With higher funds at your disposal, you can invest in a diverse range of stocks and build a well-rounded portfolio, while reducing your risk. Considering that you’re only investing 25% when buying a particular stock, you can utilise your investment fund to diversify your portfolio and manage your exposure or risk.

Flexible repayment and cost efficiency: With MTF, you can repay the amount borrowed within 275 days of investment, giving you ample time to maximise your profits and pay back with ease. With HDFC Sky, you pay a nominal charge of 12%* p.a., on the borrowed amount which translates to 1%* per month, making it a more affordable option compared to personal loans or other forms of credit.

While margin trading does allow for profit amplification with minimal resources, it does come with its own set of risks which investors must take into consideration.

Factors to Consider While Margin Trading

Investing in stock markets always come with their fair share of risk. Here’s what you need to look out for.

·        Higher losses: If the gains are amplified, so are the losses. Using the example mentioned earlier, say your ₹1 lakh worth of stock diminishes in value to ₹50,000, you’re staring at a loss of ₹50,000 on a personal investment of ₹25,000. This shows that you can accumulate losses higher than the investment amount you put in. You will need to have risk management strategies in place, discussed in the next section to prevent or minimise your losses.

·        Abrupt sell-off: The broker has the right to sell the position if the valuation drops below a certain threshold and you do not have the margin (extra funds) to cover it. The losses in this case are not the responsibility of the broker, and will be borne by the investor.

·        Minimum balance requirement: Depending on the broker, you might need to maintain a minimum cash balance as collateral until the position expires. If you do not have a minimum cash balance, you will be required to pledge your existing shares as collateral to mitigate the losses.

·        Interest: While the interest is nominal at 12%*, it is a factor to consider when exiting the position. Say you held on to the position for 60 days (2 months), your total interest on the borrowed ₹75,000 would be ₹1,479.46. This amount will be deducted from your profits.

MTF trading, while offering immense potential for profit, can also lead to significant financial strain if you’re not careful. Have the proper guardrails in place to keep your investment safe, and avoid falling into a debt trap.

Risk management in MTF

The first step to risk management is determining your risk appetite. Establish an amount that you can lose comfortably before you exit a trade position, and stick to that threshold. Here are other strategies you can use:

Stop-Loss: Set stop-loss limits that automatically trigger a sell order when the price of your stock reaches that level. Doing so prevents you from making emotional decisions during volatile times, and minimises your losses to your own acceptable limit.

Diversify your portfolio: One of the most fundamental and important rules of investing is diversification. Investing in different asset classes with different risk profiles allows you to withstand the effects of a sharp decline in any of the asset classes. It keeps your overall portfolio healthy, and resilient to adverse market movements.

Trading margin: Keep adequate amount of free margin or funds to mitigate potential losses during a market downturn and prevent the sale of the asset. Also known as maintenance margin, this is a predetermined percentage of your total investment that the broker leverages in case the total invested value goes below this point. If the investment falls below this point, the broker initiates a margin call, which requires additional deposit of funds.

Now that we’ve covered the advantages, risks, and risk mitigating strategies, here’s how you can start buying stocks on margin.

Margin Trading in India

How to invest in stocks? Investing in the stock market is simple and easy with the right margin trading app.  

·        Open Free Demat Account Online

·        Select the stock you want to buy

·        Choose the option of MTF on the order screen

·        Place the MTF order

What is the maximum MTF offered by a broker? While different brokers have different MTF limits, HDFC Sky provides up to 4 times your available capital while MTF trading.

·        MTF in Demat Account

If you’re wondering how MTF integrates with your demat account, it’s pretty seamless. Your shares will be credited to your demat account, just as they would with a regular trade. The only difference is that part of the purchase is financed by the broker, rather than your own funds. Furthermore, in some brokerage user interfaces, you might see the option of e-margin.

·        What is e-margin?

It’s the same as margin trading facility which brokerage firms like to call e-margin as the process is now done online. While MTF and e-margin are the same thing, investors are often confused about another related term – leverage trading.

·        Margin Trading Facility vs. Leverage Trading

Margin trading involves using your own funds or stock as collateral while investing in stock. Leverage trading can amplify the investment further to the ratio of 1:100 where the latter is the amount borrowed. Apart from stock investing, it can be used for investment in other financial instruments such as derivatives.

Conclusion

Investing in the stock market using MTF is a smart way to maximise your capital while keeping your upfront investment low. With the right strategy, careful research, and an understanding of the risks, MTF can be a valuable tool to help you achieve your financial goals. Just remember: stay informed, manage your risks, and don’t invest more than you’re willing to lose. With HDFC Sky, MTF can make your stock market journey much more exciting and rewarding.