Trading in stocks and other securities takes a back seat for many investors because they may lack adequate funds at the time of trading. When traders enter a trade, they may expect valuable opportunities to arise requiring them to make trades quickly. Taking advantage of price movements is at the crux of trading activity and the MTF (margin trading facility) can allow investors to make trades possible even if they don’t have adequate capital. However, if you are an investor looking to use the margin trading facility that your broker offers you, you may wonder whether this translates to profitability for you.
What is the MTF?
The MTF or margin trading facility is a way for traders and investors to afford their investments without having to worry about using their holdings. The facility is offered by brokerages as a service and the amount of borrowed capital that is lent to an investor depends entirely on the broker. The margin trading facility works in such cases when traders and investors require funds to make trades possible. In the absence of this borrowed capital, the trader would not be able to make the trade.
Investors may have part of the money for their trades, or margin money, and the rest is generated by the broker. Typically, when investors avail of a margin trading facility from their broker, they are required to put up some collateral, and this may be in the form of their holdings. Furthermore, a margin trading facility is like a loan that investors take from their brokers. This loan has to be repaid with interest. Traders and investors work on the assumption that loans they avail of through the MTF can be repaid when their trades result in potential profits.
Is the MTF really profitable for investors?
The margin trading facility or buying on a margin is a way for investors to capitalise on opportunities to invest in the stock market. It can be profitable for investors as they can make the most of trading and trade in large volumes and amplify profits. Here are some key reasons that traders and investors may view the MTF facility as a profitable way to invest in securities:
- Investors gain more purchasing power and have the potential to make more profits.
- Investors can take advantage of potentially lucrative market moves and opportunities to make potential profits.
- Investors need not use their capital to make profits.
- Traders can make the most of short-term trends in the market with the margin trading facility without having much in the way of cash reserves to execute their trades.
- In terms of interest on the loan taken via the MTF, the rates are usually lower than you would have to pay with other loans, like say, personal loans.
- The short-term capital gains tax (STCG) you have to pay is offset by the interest when you avail of the margin trading facility. This is less than you’d pay if you made profits and had to pay STCG without using the MTF.
Make Your Trading Profitable
The money margin you would have to spend to make your trades possible on the financial markets is only a fraction of the full amounts you would have to otherwise have to invest. Some investors may stay away from stock trading altogether due to a lack of capital they require to trade. The MTF encourages trading and investing activity, letting new traders enter the markets with ease and confidence.
Investors may avail of the margin trading facility with small amounts of funds till they are experienced enough to make large trades potentially profitable. With this facility, traders have the flexibility to borrow amounts they need and can afford to pay back in case trades don’t go as they expected. Also, with MTF, you can make investments to diversify your portfolio, letting you earn more profits from your investments overall.