Four Pros and Cons of Margin Trading Facility
Do you trade in the stock market? Have you heard about margin trading? Although seasoned investors may be aware of the term Margin Trading Facility (MTF) or online trading on margin, many novice traders may not be entirely sure of what these terms entail.
This article will give you a complete overview of MTF, and cover its advantages and disadvantages. Let’s get started!
What is a Margin Trading Facility (MTF)?
A margin trading facility allows traders/investors to borrow money from a brokerage firm to purchase assets. Investors can increase the number of shares they can acquire by borrowing funds in margin trading. As you can trade with more capital than you can afford, your profit, as well as loss potential, will be higher.
If margin trading intrigues you, it is important to know its upsides and downsides before implementing it for your online trading.
What Are the Pros of MTF?
Listed below are the major benefits of the margin trading facility.
Greater Purchasing Power
The fact that margin trading boosts an investor’s purchasing power is its most evident advantage. Your buying power is effectively 5x or 10x based on the terms and conditions of your brokerage firm.
Greater Chances of Return
You can purchase more securities thanks to increased purchasing power than you otherwise could. Margin trading allows you to trade with more capital and your potential profit increases if your investments or trades increase in value.
A margin trading facility typically offers greater flexibility than other borrowing funds otherwise. Depending on your chosen tradeline, you may have to maintain margin requirements, but apart from that, terms are flexible. You can put cash or your existing shares as collateral to fulfil margin requirements.
Large and Multiple Trading Positions
Using margin trading, you can opt for large trading positions for stocks, options, futures, etc. Also, you can take more than one trade and even different trades in different financial instruments. This is one of the biggest advantages of opting for margin.
What Are the Cons of MTF?
Let’s check some of the disadvantages associated with margin trading.
It’s risky to borrow money for trading purposes as the future prices of financial assets whether stocks or options are uncertain. If the asset price crashes, the fund needs to be repaid within a short timeframe. Thus, margin trading can result in significant losses if the value declines.
Interest needs to be paid on all loans, and margin is no exception. When you borrow money to trade on margin, you are required to pay interest on that amount. Before lending money, you must consider the cost of borrowing money to make and reap profits from margin investments.
When a broker offers margin, there are often two margin requirements: one for initiating a new account and one for maintaining an existing one. Your account must retain sufficient value once you create a position by purchasing shares to satisfy the brokerage’s maintenance margin requirements.
This can also lead to the forceful liquidation of your existing investments to cover the margin or the losses.
The Bottom Line
Remember that every coin has two sides and so does MTF. We hope you find this article insightful; this is all that you should know before making a trade using the margin facility.