Margin Call in MTF: What It Is, Causes & How to Avoid Forced Square-Off

In the world of trading, there are various tools that can be used by traders to enhance their returns. One of such tools is a margin trading facility through which one can enhance their purchasing power without investing the full amount upfront. But few investors know about the margin call, in which the broker can sell your shares without your permission.

In today’s blog post, we will give you an overview of margin calls and how to avoid it.

What is a Margin Trading Facility?

A margin trading facility is a facility offered by a SEBI-registered stockbroker to their investors so that they can buy shares only by paying a part of the total purchase value, whereas the remaining amount will be paid by the broker. Margin trading increases the purchasing power of a trader, which can enhance their risk with a limited amount of capital, but it carries certain risks.

Features of Margin Trading Facility

The key features of the margin trading facility are as follows:

1. Increased Purchasing Power: The margin trading facility allows an investor to buy more shares with their limited amount of capital. This helps them take a larger position in the market.
2. Funding by Broker: The broker with whom you have a demat account funds a significant portion of your investment.
3. Interest: The amount funded by your broker is chargeable. They charge a certain interest on it. The frequency of interest is generally daily, and it continues till your position is closed.
4. Carry Forward Trade: Unlike intraday traders, an investor can carry forward their position for a longer period of time.

What is a Margin Call?

A margin call is an intimation from your broker in which they ask you to add more funds or securities to your trading account when your margin falls below a certain level. It is generally considered a warning from your broker that your current investment is losing its value and you need funds and securities to maintain such a balance.

Reason for Margin Call

The key reasons for margin calls are as follows:

1. Decrease in Stock Price: When the stock price decreases, the total value of your holding will also decrease. This will result in margin calls.
2. High Use of Leverage: When a trader borrows too much margin, it increases their risk of a margin call. In this case, even a slight price decrease can significantly impact the value of holdings.
3. Collateral Value: If you have pledged your share as collateral to your broker and its fair market value decreases, this will result in a margin call.

Read Also: Is Margin Trading Facility (MTF) Safe in India?

Example of Margin Call

Let’s understand the margin call through an example mentioned below:

You purchased shares valued at INR 1,00,000 by using the margin trading facility offered by your broker.
And you have invested 30,000, and the remaining 70,000 will be funded by your broker. Considering that an investor is required to maintain a margin of 25%.

Let’s say the market falls and your investment value falls to INR 80,000. And the fund provided by the broker, which is 70,000, is deducted from the investment value. And as stated earlier, the margin requirement is 25%. Hence, the required margin is 25% of 80,000, which is 20,000 INR.

As you have only 10,000, but you must have 20,000. In this case, you have a shortfall of 10,000 INR, which can be completed by adding 10,000 INR to your account or by pledging securities valued at 10,000.

What is Force Square-Off?

A forced square-off is a situation in which your broker automatically squares off your position without taking approval from you because you failed to deposit the required amount in your trading account. Brokers generally inform their investors about the requirement of margin, which is generally known as a margin call, and if the traders do not respond to a margin call in time, they can square off their position.

How to Avoid Force Square-Off

The force square-off can be avoided by a trader by following the steps mentioned below:

1. Using Leverage Wisely: An investor is allowed a high leverage by their broker, but it is advisable to use it within a comfortable limit; a lower leverage leads to a lower risk of margin calls.
2. Portfolio Monitoring: As stock prices are highly volatile, one must keep a keen eye on the movement of stock price, so that one can save themself from forced selling.
3. Place Stoploss: A stoploss must be placed by the trader based on their pre-defined risk level. It helps a trader to minimise their loss and prevent a margin call.
4. Avoid Trading in Volatile Stocks: One must select the stocks that have low beta if they are purchasing them on margin, so that the volatility in the portfolio can be avoided. 

Read Also: How to Activate MTF on Pocketful?

Who should use Margin Trading Facility?

Margin trading facility is suitable only for experienced and active trader who understand the volatility of the market and wish to enhance returns by leveraging their returns. If a trader finds a short to medium-term opportunity to purchase a stock and has a limited amount of capital, they can borrow the funds from their broker in the form of margin and enhance their purchasing power to utilise market movement. Pocketful also helps investors by offering a transparent margin tracking facility at the lowest MTF interest rate, which helps an investor in making an informed decision. 

Conclusion

On a concluding note, using a margin trading facility helps an investor in enhancing their returns; however, using it can increase the risk of a margin call. MTF is generally not offered by brokers in all stocks; there is an MTF-eligible list of stocks in which a trader can invest. Monitoring of the portfolio is necessary to avoid any margin call and forced square-off. Through the Pocketful web and mobile application, one can easily access the facility of margin trading facility, but it is advisable to use proper risk mechanisms and consult with your investment advisor before making any investment decision.

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