There are many ways to maximise profits in share market trading. One such method is MTF trading. But what is MTF in share market? MTF, or Margin Trading Facility, lets market participants trade stocks, bonds, and derivatives with leverage.
If you’re a day trader, MTF trading may give you more trading possibilities and boost your profits. This article will explain MTF trading and how it can help you reach your trading goals.
What is MTF Trading?
Margin Trading Facility is a type of trading where an investor borrows funds from a broker to buy securities. This allows the investor to amplify their potential returns but also increases their risk exposure.
Suppose an investor, Mr. Sharma, wants to buy shares of ABC Company, which are currently trading at Rs. 200 per share. He has Rs. 20,000 available to invest. Without margin trading, Mr. Sharma would only be able to purchase 100 shares (Rs. 20,000 ÷ Rs. 200/share).
However, Mr. Sharma’s broker offers a margin trading facility with 4x leverage. This means that for every rupee Mr. Sharma invests, the broker will lend him an additional 3 rupees, allowing him to buy more shares.
With the margin trading facility, Mr. Sharma’s Rs. 20,000 investment is now worth Rs. 80,000 (4x leverage). This allows him to purchase 400 shares of ABC Company (Rs. 80,000 ÷ Rs. 200/share).
Now, let’s assume the share price of ABC Company rises to Rs. 220. Mr. Sharma decides to sell his 400 shares at the new price, generating a total revenue of Rs. 88,000 (400 shares x Rs. 220/share).
After selling the shares, Mr. Sharma must pay back the broker’s loan of Rs. 60,000 (Rs. 80,000 – Rs. 20,000). This leaves him with Rs. 28,000. When we subtract his initial investment of Rs. 20,000, Mr. Sharma’s profit is Rs. 8,000, while in a case without leverage, it would be Rs. 2,000.
However, If the share price decreases, the investor might lose more than their initial investment.
How MTF Trading Can Help Day Traders
Margin trading facility trading can be a valuable tool for day traders, providing them with increased buying power and the potential for higher profits. Margin trading can help day traders in a few ways:
1. Increased Buying Power
Margin trading enables day traders to increase their buying power by borrowing funds from a broker or exchange. With a larger buying power, traders can open positions with a larger size, potentially leading to greater profits.
Margin trading is risky since losses might outweigh original investments. It is crucial to have a sound understanding of margin trading and to implement risk management strategies to minimise potential losses.
2. Short Selling
Margin trading enables day traders to short-sell, which means they can potentially profit from declining markets. Instead of purchasing cheap and selling high, short sellers might sell high and purchase low. Borrowing and selling a stock or coin from the broker or exchange does this.
If the asset’s price drops, the trader can purchase it back and return it to the broker for a profit. However, if the price increases, the trader can suffer significant losses.
3. Diversification
Margin trading allows day traders to use their account balance to trade multiple positions, which can help them diversify their portfolios. By diversifying, they can potentially reduce their risk and increase their overall returns.
For example, a trader with an Rs. 10,000 account balance might use margin trading to start positions in various markets or assets, like stocks, futures, or options. This can help spread their risk and potentially increase their chances of profiting from different market conditions.
4. Stop Loss Orders
Stop loss orders in trading allow traders to automatically close a position at a pre-determined price to limit their losses. With this feature, traders can set a price at which their trade will be closed if the market moves against them.
This can be especially helpful for day traders who often have many positions open at once and may not be able to monitor them constantly. Using stop-loss orders can help day traders manage their risk and potentially minimise losses.
Conclusion
In conclusion, understanding MTF in the share market is crucial for day traders looking to maximise profits through online stock market trading. MTF trading provides several advantages over traditional trading methods and can significantly increase profit margins when used correctly.
However, it’s essential to consider the risks involved and market conditions before incorporating MTF trading into a day trading strategy.
Also read: What is A Candlestick Pattern?
