Is MTF Ideal for Intraday Trading? Get the Facts

Traders use margin trading to provide leverage for their positions and maximize possible profits. Margin Trading Facility (MTF) is one such margin facility available to traders. One important question arises—Is MTF conducive to intraday trading?

Understanding Margin Trading Facility (MTF)

Margin Trading Facility (MTF) is a service offered by brokerage firms allowing traders to buy stocks by paying only a portion of the total cost while borrowing the remaining amount from the broker. The trader uses the purchased stocks as collateral, and interest is charged on the funds borrowed.

How Does MTF Work in the Share Market?

When an investor opts for MTF, he is acquiring shares worth more than his capital by leveraging the broker's funds. The leverage ratio is determined by the broker and hence may vary in the case of different firms. Minimum margins are usually required to be maintained with the broker; otherwise, they could liquidate the position to cover the dues.

The MTF is typically used by traders and investors wanting to keep positions for more extended periods since MTF facilitates maintaining leveraged positions in a delivery-based trading framework.

Differentiating MTF from Intraday Trading

An important distinction between MTF and intraday trading ought to be made first before understanding whether MTF can benefit intraday trading:

Intraday Trading: Stocks are bought and sold within a single session. The trader makes money not by taking delivery of the stocks but by cashing in on short-term price movements. The position, when kept open until the end of the day, is automatically squared off.

MTF: MTF allows traders to carry their leveraged positions over more than one trading day, thus favoring being allied with short to medium-term holdings rather than rapid intraday trades.

Is MTF Suitable for Intraday Trading?

Though MTF gives traders the benefit of leveraging their capital, the following reasons account for its being unsuitable for intraday trading.

1. Higher Interest Charges

One of the important aspects of MTF is that the brokers charge interest on the margin amount being procured. For an intraday trader closing his position same day, it does not make economic sense to pay interest for margin funds because charges may exceed an equivalent profit.

2. Net Leverage

In any case, there are great leverage options in this case: intraday trading has such options ranging from 5x to 20x depending on the broker and stock being traded. In contrast, MTF generally permits lower leverage, with a range ranging from 3x to 5x, which in and of itself may not coincide well with the interests of an intraday trader looking for maximum exposure.

3. Risk of Forced Liquidation

In intraday trading, positions are automatically liquidated at the close of the trading session. In MTF, traders must ensure they have a margin to avoid forced liquidation by the broker. This adds another risk that intraday traders would like to avoid.

4. Holding Suitability

MTF is best geared toward traders wanting to hold their positions for a short time of a few days or weeks to benefit from price movements. Intraday trading, on the other hand, is based on rapid fluctuations, making MTF less effective for this kind of strategy.

5. Regulatory Constraints

The Securities and Exchange Board of India (SEBI) has laid down stipulated guidelines concerning margin trading and intraday trading, which are strictly adhered to by brokers under the margin requirements.

When is MTF Applicable Instead of Intraday Trading?

While MTF is not suitable for day trading, the following situations are where MTF can come in handy:

Short-Term Positional Trading: If you expect a stock's price to rise over a few days or weeks, but you do not have the full amount to pay for that quantity, MTF allows you to take advantage of leverage.

Swing Trading: For the swing traders-holding stocks only for a short period to await price movements-MTF pays off.

Leverage-in-action: Long-term investors who want full exposure, although not necessarily full capital commitment to a particular investment, can take advantage of MTF, albeit with caution.

Conclusion

While MTF does comprise a very useful tool of margin trading for investors seeking to hold leveraged positions even beyond just one trading session, it is not suited for intraday trading. Interest costs, leverage differences, and MTF nature make it less practical for intraday trading for traders who would benefit more from traditional margins available for intraday trading offered by brokers.