A beginner's guide to the margin trading facility (MTF)

Some investors want to buy more shares than their cash allows. A margin trading facility, or MTF, offered by brokers makes this possible. This page explains how a margin trading facility works, the SEBI rules around it and the risks you should know.

Quick answer

A margin trading facility (MTF) is a service where a SEBI-registered broker funds part of the purchase price of eligible shares, and the investor pays the rest as margin. The shares bought are pledged with the broker as security. The investor pays interest on the funded amount and must keep enough margin. If prices fall, the investor may have to add money or the broker may sell the shares.

Key takeaways

• MTF lets you buy shares with partial payment.
• The broker funds the rest and charges interest.
• Only eligible securities, mainly Group I shares and equity ETFs, qualify.
• Bought shares are pledged to the broker as security.
• Losses grow faster because you use borrowed money.

What is a margin trading facility?

It is a form of borrowing to invest. You pay a part of a share's price upfront, and your broker lends you the rest. You can then hold the shares for longer than one day, as long as you keep enough margin and pay interest.

SEBI first allowed margin trading in 2004 and issued an updated framework in 2017. Only brokers who meet SEBI's conditions can offer it, and they must keep proper records of the funded positions.

Which shares are eligible?

Under SEBI rules, MTF is allowed only for Group I securities, which are liquid shares that trade frequently. In 2022, SEBI also allowed units of equity ETFs classified as Group I. Brokers may have their own narrower list.

The initial margin depends on the share. For Group I shares in the F&O segment, it is VaR plus three times the extreme loss margin (ELM). For other Group I shares and equity ETFs, it is VaR plus five times ELM. This keeps margins higher for riskier stocks.

How does it work with an example?

Suppose you want to buy shares worth Rs 1 lakh and the required margin is 30 percent. You pay Rs 30,000 and the broker funds Rs 70,000. If the share rises 10 percent, your position is worth Rs 1.1 lakh, and your Rs 30,000 has gained Rs 10,000 before interest and costs.

If the share falls 10 percent, you lose Rs 10,000, which is a third of your own money. If the fall continues, the broker will ask for more margin. If you cannot pay, the broker can sell the pledged shares to recover the loan.

What are the costs and risks?

You pay interest every day on the funded amount, so holding for long periods adds up. Brokerage, taxes and pledge charges also apply. These costs reduce any gains and add to losses.

The biggest risk is leverage. Using borrowed money makes both profits and losses larger compared with your own capital. In fast-falling markets, forced selling can lock in losses. MTF does not guarantee returns and suits only those who fully understand margin calls.

The key point to remember

A margin trading facility lets you buy more than your cash allows by borrowing from a broker. It comes with interest costs and higher risk, so it needs careful use and clear limits.

Frequently Asked Questions