For investors short of capital but willing to invest in securities, margin trading is no less than a blessing. With the marginal trading facility or MTF Trading, investors can borrow from their brokers, and then invest in financial securities. This borrowed capital enhances the purchasing power of the investors, giving them the opportunity to earn more profits than they could have with their original capital.
MTF trading offers a variety of benefits. And with it comes certain risks; let’s delve deep to understand the same.
Benefits of MTF Trading
Here are some of the benefits you get to enjoy by availing of the margin trading features:
- Leveraging Assets
With margin trading, you are able to leverage your existing assets. This leverage value helps you enhance your investment size, helping you earn bigger profits.
- Maximised Profits
With MTF, you can potentially increase profits by leveraging borrowed funds to buy stocks, allowing for higher exposure in the market. However, MTF does not involve short-selling. Instead, you can buy more shares than you could with your own funds and benefit from upward price movements. Keep in mind that while profits can be amplified in rising markets, losses can also increase in declining markets if the share prices drop below expectations.
- Easy Source of Credit
The best part about MTF trading is its easy procedure. Once you’ve availed the feature of margin borrowing on your account, you may get margin loans anytime you need. You do not have to fill out extra forms, stand in queues, and miss out on exciting investment opportunities meanwhile.
- Diversified Portfolio
You can use your borrowed funds to diversify your portfolio, which can ultimately help you speak and, thus, minimize risks. The borrowed margin can be used through a trading app to invest in multiple assets instead of investing in a single stock.
- EnhancedI nvestment Capacity
With MTF, your purchasing power is enhanced. This ultimately, helps you make bigger investments and earn higher returns that could have been otherwise not feasible for you.
Risks of MTF Trading
While margin trading offers a bunch of advantages, it isn’t risk-free. Here are some common risks of MTF you must be aware of:
- Losses Can be Amplified Too
MTF trading offers amplified advantages. However, it heightens the risks, too. In case of market downward fluctuations and inaccurate predictions, your losses may go beyond the investment. This means, you now have to repay the losses, the borrowed amount, and the interest.
- The Risk of Margin Call
For margin trading, you are supposed to maintain a minimum margin or collateral. In case, this value of the collateral falls beyond the set limit, you might have to deal with a margin call. The margin call serves as your reminder to deposit extra funds or else you might have to liquidate your holdings.
- Liquidation of Assets
The fear of liquidation is one of the major risks of MTF trading. In case of a margin call, repayment failure, or inability to deposit your interest, your broker has the right to liquidate your assets. This can cause you huge losses while also leaving you to struggle with high debts. Further, the emotional stress coming from it cannot be undermined.
Bottom Line
Margin trading can be used as a great financial tool helping you access credit when needed. However, one must understand that with benefits, the risks are inevitable. This makes it important for you to clearly understand the risks and rewards of margin trading before opting for the feature.
However, you may follow small practices to ensure you minimize the risks of MTF and make the most out of it. Always try to maintain enough cash in your account to avoid the risks related to margin calls. Consider educating yourself on market volatility and invest accordingly. Further, try identifying and investing in shares with growth potential. Once you’re able to balance the benefits and risks, MTF can help you greatly.
Last Updated on by Icy Tales Team