It is a well-known phrase that ‘you need money to make money’. In the context of trading, you need only some money to make a decent amount. There are facilities such as Margin Trading Facility (MTF) and Pledge Margin that makes life easier for traders who are low on capital. If these trading terms are confusing you, don’t worry. Here we will look at the concepts of MTF and pledge margin and discuss their differences.
What are Margin Trading Facility (MTF) and Pledge Margin?
Margin Trading Facility (MTF) is a type of financing that allows traders to purchase securities using borrowed funds from brokers. Here you will pay a partial amount called ‘margin’ and the broker will fund the rest with ‘leverage’.
Dhan MTF provides 4x leverage on 950+ stocks and scrips through their platform. Pledge Margin in online trading allows investors to obtain a loan by pledging a portion of their existing stock portfolio in their demat account as collateral. The loan amount obtained can then be used to purchase additional securities. Let’s look at the difference between both concepts in detail.
What are the Differences Between MTF and Pledge Margin?
MTF and Pledge Margin, though similar in their basic premise of providing traders and investors with added financial leverage, differ in their purpose, mechanism and execution. Here is how.
Purpose
MTF is primarily aimed at providing you with additional leverage to carry out short-term speculative trades, while pledge margin is meant to help you secure additional funds for long-term investments. However, some online trading platforms offer unlimited holding period for MTF, allowing you to sell your MTF holding only when you want.
Mechanism
MTF operates by allowing you to borrow funds from brokers to increase your buying power, while pledge margin involves pledging a portion of your existing portfolio as collateral for obtaining a loan. MTF requires a partial payment for the trade, while the pledge margin considers your shares as a guarantee of payment.
Regulations
MTF is subject to stricter regulatory oversight compared to pledge margin, with SEBI placing several restrictions on the use of MTF to ensure that traders do not engage in excessive speculation. Thus, you can lose the fear of losing your entire capital or compromising your portfolio if you trade MTF wisely.
Risk
MTF carries some risk as it involves borrowing funds, and you must repay the borrowed amount, along with interest, regardless of the performance of your trades. On the other hand, pledge margin carries a relatively lower risk as the collateral pledged you pledge serves as a safety net. Online trading platforms with MTF like Dhan provide 4x interest-free margin until settlement day.
Conclusion
In a Margin Trading Facility, you pay a margin of the trade while your broker funds the rest so you can take leveraged positions. On the other hand, pledge margin involves using existing assets in the demat account as security to avail extra margin. Dhan provides a world-class MTF where you can enjoy a whopping four times leverage on your trades.
