How does a demat account facilitate margin funding in trading? MintGenie explains
Margin Trading Facility (MTF) is a service provided by select brokers in India that allows investors to purchase securities by paying only a portion of the total transaction value, known as the margin. This margin can be paid either in cash or through shares held as collateral.
In this facility, the broker finances the remaining portion of the transaction as a loan and applies daily interest charges to it. The securities acquired through MTF are held as collateral by the broker until the investor repays the loan in full.
Consider a scenario where an investor aims to purchase shares valued at ₹20 lakh, but their account holds only ₹2 lakh. Utilising the Margin Trading Facility, they can acquire the shares by providing ₹2 lakh as the margin and securing a loan of ₹18 lakh from the broker.
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In this case, the investor leverages their initial investment by 10 times, thereby expanding their potential profits significantly. By increasing the order size from ₹2 lakh to Rs. 20 lakh, they amplify their profit potential.
Retail investors have the option to acquire stocks by paying 25% of the total value, with brokers financing the remaining amount for a duration of up to one year. The interest rate imposed by brokers varies between 7% and 18%, contingent upon the client's risk profile.
Many brokers offer MTF for approximately 1,000 stocks listed in the Indian stock market.
In India, margin trading has seen a sharp rise due to increased participation from retail investors. With the Indian economy growing robustly, individuals have more disposable income, and many are choosing to invest in the stock market.
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