A margin trading facility (MTF) is a tool that many stock market buyers use to improve their buying power. Using MTF trading, buyers can borrow money from a broker to buy stocks and other assets.
This allows you to take bigger bets in the market than you could with your own money. While margin trading comes with risks, it can also offer significant advantages to you as an investor.
In this article, let’s explore the five advantages of trading stocks with MTF and help you understand how this tool can benefit your investment strategy.
What is MTF in Stock Market?
MTF lets you diversify your portfolio by buying more than you can afford. In other words, a trader can buy more shares than they usually could with the cash they have.
Here are five advantages of trading stocks with MTF:
1. Increased Leverage
With MTF, you can use borrowed funds from the broker to purchase more shares than you would normally be able to with your available cash, effectively increasing your leverage.
For example, a trader with ₹10,000 can acquire ₹50,000 in equities using MTF. If the stock rises in price, you can sell it for a profit and repay the broker.
The increased leverage provided by MTF can lead to higher profits in a rising market, but it also increases the potential for losses if the market turns against you.
2. Ability to Short Sell
MTF allows investors to short-sell stocks. This means they may borrow money to sell shares from a broker, then purchase them back at a reduced price to earn a profit. This can be advantageous in a bearish market, where the prices of stocks are falling.
By short selling, you can profit from the decline in stock prices. But short selling also has risks, such as the possibility of endless losses if the stock price keeps going up. It should be conducted carefully and with an understanding of the risks.
3. Diversification of Portfolio
MTF lets investors diversify their portfolios by investing in equities across market caps. You can lower your risk of loss by diversifying across asset types.
4. Access to Bigger Positions
MTF is particularly useful for online intraday trading as it allows you to invest in higher-priced stocks that you might not be able to afford with your available cash. Investors use intraday trading to profit from short-term market changes.
With MTF, you can use borrowed money from the broker to purchase stocks and potentially make a profit on the same day. These advantages can be especially beneficial for you in a bull market where prices are on the rise.
5. Potential for Higher Returns
MTF has the potential to generate higher returns than traditional stock trading due to increased leverage and the ability to short-sell. With the ability to purchase more shares than available cash, investors have the opportunity to make more profits in a rising market.
Short selling can also provide opportunities for profit in a bearish market. These advantages can be especially beneficial in a bull market where prices are on the rise. However, investors should also be aware of the potential for losses and carefully consider their trading plan and margin call process.
Conclusion
Trading stocks with Margin Trading Facility (MTF) can provide traders with increased leverage, the ability to short sell, diversification of portfolio, access to higher-priced stocks, and potential for higher returns.
However, having a solid trading plan and understanding the risks of margin trading is crucial for you. Overall, MTF can be a valuable tool for you when used responsibly and with proper understanding.
