What is Margin Trading and What are the Precautions You Require?

Today’s fluctuations of the stock candles had your hopes of making a substantial intraday profit. However, the lack of funds kept you off-trading today. This can be a situation for any novice trader or someone who has experienced a substantial trading loss recently. This is when MTF trading can be an option.

The bulls and bears of the stock market can deliver both profit and loss days to the traders. Some days can be a profit day. Choosing a wrong trade or avoiding stop loss can trigger loss probabilities.

At times, traders may also find themselves in a position of capital crisis. Let’s explore how MTF trading, also known as Margin Trading Facility, can help you out in such a situation.

What is Marginal Trading?

To understand the art of MTF trading, let’s first dive into the basics of marginal trading. Marginal trading gives a trader the required funds as a loan to accomplish their trading goals. 

In simple terms, marginal trading can be seen as a debt taken from a lender to buy stocks that a trader cannot otherwise purchase. 

Here is an example to help you understand better:

Roona, a 32-year-old woman, has had her hands in trading for the past 3 years. Recently, Roona faced a substantial loss. Now, Roona wants to purchase 1000 stocks of a company for which she requires ₹10 lakh in intraday trading. Since Roona is left with nominal funds, she opted for MTF trading.

 

The lender let her borrow ₹10 lakhs for trading while keeping the stocks as collateral. Now, Roona can carry on her trading and gain profit. Depending on the terms and conditions and interests of the lender, she has to repay the loan on time.

Precautions While MTF Trading

Marginal trading can be done with the aim of intraday as well as position trading. Depending on the trading goals, the type of stocks chosen, and the market performance, one may choose to hold stocks under position trading. Now, let’s understand the precautions that you must take:

• Stop Loss is a Must

The moment you begin the stock dealing, make sure to put the stop loss. It can cause a blunder if you hold on to stop loss until the opportune moment comes. Once you have positioned the stop loss, refrain from fluctuating the same. Only then can you expect an ideally safer profit margin.

• Calculative Decisions in Respect to Unexpected Market Shifts

Market can be extremely volatile at times, especially under intraday trading. Even in position trading, calculating your investment is quintessential. 

Try not to overstretch your turnover time to avoid unexpected fluctuations. One wrong decision can cause you more losses than your investment. So, make calculative moves.

• Minimum MTF Account Balance

Usually, your MTF account has a minimum balance clause. You need to maintain a specific amount in your MTF account at all times. Falling below this limit may be an intimation for you to sell some or all of your stocks to maintain the minimum balance limit.

• Spread Your Stocks

Exhausting all your funds in a single trade or stock can be quite risky. The market volatility, minimum balance rule, and mental stress can all sometimes trigger loss points for you. In such a situation, if you have multiple investment stocks, the chances of making major losses are low.

To Wind Up

Trading cautiously and with adequate market research can turn into a full-time profession for many. However, to create such a trading atmosphere for yourself, you need to have a strategic plan and trade with caution. 

At times when it becomes tough to cope with the losses and further trading, opening an MTF account can be a good idea. Make sure to know all about MTF trading including the risks before you enter it.