Nowadays, many investors prefer to trade with a smaller capital outlay by utilizing MTF. If you already hold shares, you can leverage them without having to sell them. By pledging your shares, you can secure additional margin, which enhances your trading capacity while allowing you to maintain your existing portfolio.
What is MTF and How Collateral Works in India
What is MTF?
MTF (Margin Trading Facility) is a facility wherein a broker funds a portion of your trade, while you provide the remaining margin. This enables you to execute larger trades even with a smaller amount of capital. It is primarily utilized for short-term trading, where you can leverage the benefits of financial leverage.
The Role of Collateral (Pledged Shares)
Collateral implies that you can obtain margin by pledging your existing shares. This eliminates the need to infuse fresh capital into your trading account. You are allocated margin based on the value of your pledged shares, allowing you to continue trading without having to sell off your existing investments.
Benefits of Pledging Shares for MTF
- Capital Efficiency and Enhanced Liquidity : Pledging shares eliminates the need to keep extra cash on hand. You can obtain margin against your existing investments, ensuring that your capital does not sit idle and your liquidity remains intact.
- Hold onto Long-Term Investments : You can utilize your strong or long-term holdings without having to sell them. This keeps your investment portfolio intact while simultaneously allowing you to reap the benefits of trading.
- Reduced Interest Costs : When you utilize collateral, the funding amount required from the broker decreases. This helps keep overall interest costs relatively under control, particularly in short-term trades.
- Fast and Easy Margin Availability : Once shares are pledged, the corresponding margin is reflected in your account almost instantly. This ensures that you do not miss out on timely opportunities and are able to execute trades immediately.
Read Also: Lowest MTF Interest Rate Brokers in India | Top 10 MTF Trading Apps
Types of Shares Eligible for MTF Collateral
What is the MTF Eligible Stocks List?
Not every stock is eligible for MTF (Margin Trading Facility). Brokers permit only those stocks that comply with the norms established by the exchanges (NSE/BSE) and SEBI. This list is referred to as the MTF Eligible Stocks List, and it generally comprises stocks characterized by stability and high liquidity.
Which Stocks Are Most Widely Accepted?
For MTF purposes, large-cap and actively traded stocks are predominantly selected, as they exhibit lower price volatility. Stocks with low liquidity or high volatility are typically ineligible, given the elevated risk associated with them.
MTF Eligible Stock Criteria
| Criteria | Description |
|---|---|
| Market Cap | Large-cap and well-established companies |
| Volatility | Stocks with Stable Prices |
| Exchange Approval | NSE/BSE approved securities |
| Broker Rules | Every broker may have some extra filters. |
MTF Pledge Process using Pocketful
- Log in to the Pocketful App or Web Platform : First, log in to your Pocketful account. You can easily complete this process on both the mobile app and the web platform.
- Navigate to the Portfolio Section : After logging in, open the “Portfolio” section. Here, alongside your shares, you will see the “Pledge” option.
- Select Shares : Now, select the shares that are eligible for MTF (Margin Trading Facility). Only approved stocks are available for pledging.
- Enter Quantity and Submit Request : Enter the specific quantity of shares you wish to pledge. The system will display the margin amount you will receive after the applicable haircut.
- Complete CDSL OTP Authorization : CDSL authorization is mandatory to pledge shares on Pocketful. You will receive an OTP on your registered mobile number or email address, which you must use to confirm your pledge request. This step is mandatory for security purposes.
- Margin Credited to Your Account : As soon as the authorization is complete, your collateral value will be reflected in your trading account. You can now utilize this margin for MTF trading.
Understanding Haircut and Collateral Value
What is a haircut?
A haircut is a percentage applied by a broker to account for risk when you pledge shares. This means that you do not receive a margin equal to the full value of your shares, but rather a slightly lower amount.
How is the haircut calculated?
| Stock Value | Haircut % | Usable Margin |
|---|---|---|
| ₹1,00,000 | 20% | ₹80,000 |
| ₹50,000 | 25% | ₹37,500 |
Example : If you have pledged shares worth ₹1,00,000 and the haircut is 20%, then ₹20,000 will be blocked for risk coverage, and you will receive a margin of ₹80,000.
Try our MTF Interest Calculator
The True Meaning of Collateral Value
Collateral value refers to the specific amount that becomes available for your actual use after the haircut has been applied. It is this specific amount rather than the total market value of the shares that you can utilize for trading under the MTF (Margin Trading Facility).
Why is the Haircut Important?
The haircut directly impacts your usable margin. The riskier or more volatile a stock is, the higher the haircut applied to it will be, resulting in a lower margin being made available to you. Therefore, it is generally more practical to pledge stable stocks.
Charges Involved in Pledging Shares
| Charge Type | Details |
|---|---|
| Pledge / Unpledge Charges | ₹25 per transaction per ISIN + GST. This includes all requests pledge, unpledge, and invocation. |
| MTF Interest | Interest is charged only on the amount funded by the broker. It is calculated on a daily basis. |
| Invocation Charges | If the broker is required to sell shares (due to a margin shortfall), a charge of ₹25 per ISIN + GST applies to this as well. |
Conclusion
Pledging shares for MTF can be a smart strategy, provided it is utilized with proper understanding and planning. It provides you with additional margin without requiring you to sell your shares; however, understanding the associated risks and charges is equally important. The full benefits of MTF can be realized only by selecting the right stocks and keeping the margin usage under control. For market insights & latest news, download Pocketful – offering zero brokerage on delivery, zero AMC, and advanced tools for F&O trading.
Frequently Asked Questions (FAQs)
What does pledging shares in MTF mean?
It means using your shares as collateral to obtain a margin, allowing you to trade without needing extra cash.
Can I sell pledged shares anytime?
No, it is mandatory to unpledge the shares before selling them.
How much margin do I get after pledging?
You do not receive the full value of the shares; the usable margin is made available only after applying a ‘haircut’.
Is pledging shares safe?
Yes, the process is secure as it involves CDSL authorization; however, market risks always persist.
Are all stocks eligible for MTF?
No, only approved shares that appear on the list of MTF-eligible stocks can be pledged.
