MTF: Zero Balance Trading

In this article, we will discuss

• What Is Margin Trading Facility?
• Significance of MTF
• What Is Zero Balance Trading?
• Ways to Open a Zero Balance Demat Account
• Eligibility Criteria to Open a Zero Balance Demat Account
• Documents Required to Open a Zero Balance Demat Account
• Why Should You Choose Samco?
• Important Things to Keep in Mind
• Conclusion
• FAQ's 

Margin Trading Facility (MTF) enables traders to buy shares with a fraction of the total transaction value. It is an effective financial tool which helps traders make use of a good trading opportunity despite a shortage of funds. You must be aware that you need to have a demat account for trading. It’s an account where you store your shares and securities electronically. Generally, customers are required to keep a minimum balance. But with a   account, you can start trading with no restrictions. In this article, we will focus on the important details related to zero balance demat accounts with margin trading facilities. Read on.

What Is Margin Trading Facility?

The underlying concept of MTF is that traders have to pay only a fraction of the total value of the position they hold. The amount they pay is referred to as margin and thus the name Margin Trading Facility. Traders can pay the margin amount either in cash or by offering additional securities. In other words, MTF involves leveraging positions by pledging cash or security to one’s broker. The broker provides financing for the rest of the transaction. Traders need to settle it off later with interest when they square off their position. An important point to remember here is that traders can earn profits only when the returns are much higher than the interest accumulated; otherwise, they suffer a loss. Previously, traders could use only cash as a margin. But a few years ago, the market watchdog Securities and Exchange Board of India changed this rule. Now, people can create positions under MTF using shares as well. 

Significance of MTF 

Here are the reasons why margin trading is so important to traders: 

• It helps traders benefit from ultra-short-term trading opportunities at a time when they don't have the funds to get delivery of their purchased shares.
• MTF is similar to leveraged trading and is particularly beneficial for stocks where futures are not available. Traders can buy/sell stocks at a fraction of the total value. Moreover, they can pay the margin easily in cash or use other securities as collateral. 
• Taking positions beyond one's immediate means can be quite profitable, especially for high-conviction calls. 
• MTF is a beneficial way to use shares lying idle in your zero-balance trading account. You can offer these shares as collateral to take up MTF positions in the equity market. 
• By employing MTF, traders can improve their RoI (Return on Investment). Suppose a person is trading on margins and pays only 20% of the costs. If the price moves up significantly, they will earn exponential RoI.
• MTF facilitates good economics because traders are using the loan to purchase an appreciating asset such as equities. It helps people to create wealth in the long run. 

What Is Zero Balance Trading? 

Also known as a zero balance demat account, it offers all the features of a demat account without the mandate of a minimum balance. It enables people to save the amount that would have been otherwise contributed to maintain a minimum balance. Several brokers also offer zero brokerage charges on these accounts for a limited period or a subscription plan. Let’s look at the different types of zero balance trading and demat accounts offered by brokers:

• Zero Brokerage for All Segments 

These accounts let people trade in all market segments without paying brokerage charges. They can buy or sell equities, debt, futures and options, commodities and other investment products without paying any charges subject to certain conditions.

• No Commission for Delivery Trading 

No brokerage charge is applicable for delivery trading. To be precise, traders can buy or sell single stocks without paying any fees. Many traders do not participate in the equity delivery segment; these accounts are popular among such traders.

• Plan-Based Trading Accounts 

People use this type of zero balance trading account for regular and bulk trades. Traders will have to first subscribe to either a monthly or annual plan of their choice. No brokerage fees will be charged once they open their type of account.

Ways to Open a Zero Balance Demat Account 

If you are looking for a zero balance demat account, follow these steps to create one:

• Create a List of Available Brokers 

Remember that very few stockbrokers in India offer unlimited trading plans and zero balance accounts at the same time. Another point you must never forget is that your zero balance trading account plan may start accruing charges after a year or so. You should visit the official websites of the stockbrokers in India for details of zero balance demat accounts. If you are looking for accounts with margin trading enabled, remember to choose a broker offering the lowest interest rates.

• Compare and Choose All the Plans 

After you have shortlisted all options of brokers, make a list of the required services and then check whether these brokers offer them or not. Remain alert because brokers might charge unexpected fees. For example, certain stockbrokers can charge additional transaction fees. Another broker may charge additional penalties on short margins.  These points may not be openly stated but referenced in the small print. Go through the policy documents of each broker minutely before narrowing down your search.

• Go Through the Taxation Policy and Pricing Structure 

The pricing details of a plan you have shortlisted are of utmost importance. Do note that the pricing details will be available on a separate page and not on the main website. Go through the page minutely as it'll help you decide whether any charges will apply to your zero balance trading account or not. Remember that even in zero balance accounts, Depository Participants (DPs) have to deduct GST charges. Furthermore, stock exchanges may have separate transaction charges. All of these charges, which are different from the stockbrokers’, may not be stated in zero balance plans. Going through the aforementioned steps will be helpful when you decide to open a zero balance trading account.

Eligibility Criteria to Open a Zero Balance Demat Account

Check the eligibility criteria to open a zero balance demat account in India: 

• There is no minimum or maximum age restriction to participate in the Indian stock market. In other words, a person doesn’t have to be 18 years of age to open a demat account.

• A parent or guardian can open a demat account in the name of a minor. The account holder can take charge of the account after he/she attains the age of 18. 

• It’s compulsory to complete KYC before opening a demat account in India. 

Documents Required to Open a Zero Balance Demat Account 

Check the list of documents required to open a zero balance trading account in India: 

• A person who wishes to open a demat account must submit their PAN card and fill up a KYC form online.
• They have to submit their proof of identity, address and income. Proof of bank accounts has to be submitted as well. 

Why Should You Choose Samco? 

The New-Gen Samco Mobile Trading Platform helps every stock market participant achieve their best financial performance. Open the best trading account with us and beat the market. Get margins against shares at zero cost with our Margin Trade Funding. The key features of the Samco Mobile App include:

• Personal Index 

Build and track your personal index. Now, you can improve the performance of your personal index by aiming to outperform the market index.

• Peer Comparison Tracker 

Compare the performance of your index with that of others within the Samco community. 

• Net Worth Tracker 

Evaluate and compare your net worth within the Samco community. 

• Power Inbox 

Get real-time insights, personalised feeds and order status. 

• Personalised Feeds 

Get customised market insights and feeds all in one place. 

• Social Sharing 

Share your net worth and MyIndex performance with your friends and family.

• Trading Style Analysis 

Get categorised depending on the traded turnover and trading style. 

• Star Fund Manager 

Compare your trading performance with that of famous fund managers who manage funds of more than ₹20 crore.

Important Things to Keep in Mind 

Remember that margin trading is often described as a double-edged sword because it can provide high profits as well as heavy losses. Here are the important things you must keep in mind when opting for an MTF account.

• Stop-Loss is Mandatory 

Make sure stop-loss is part of every order you put with intraday margin trading. It is never a good idea to get into a position and then wait for a moment to put a stop-loss. Moreover, it is important to maintain a certain amount of discipline to stop loss.  Otherwise, a sudden negative movement can wipe out all gains you have worked hard for.

• Maintain Discipline for Profit Booking 

Try and maintain a disciplined approach when it comes to profit booking. Keep trying to reduce the turnaround time for your positions. This is a good way to combat market volatility.

• Avoid Volatile and Static Stocks 

If you have decided to avail MTF, try to avoid stocks which are too volatile or too static. If you choose such stocks, you stand the risk of losing money. Static stocks hardly provide any movement. However, the interest will keep on piling up. In the case of volatile stocks, you can face tremendous losses at a moment’s notice.

• Be Responsible for Your Margin Trading Position 

As traders, you must take full ownership of your margin trading position. The responsibility to close down the position should not be left to the broker because the latter will not take into account your profitability when closing it.  What you can do is set a time limit and close out your positions in time while minimising losses as much as possible. Don’t forget to track your margin trading position regularly.

• Calculate Costs Beforehand 

You must calculate the costs and breakeven points for your trading positions before opting for margin trading. Some of the costs associated with MTF include DP charges, administrative charges and processing charges. These are in addition to the interest payable.  Don’t forget to take into account the statutory cost before working out the break-even. It’ll help you understand whether a leveraged position is worth it or not.

Conclusion

To sum up, Marginal Trading Facility (MTF) helps people buy shares at a fraction of their total value. An important benefit is that it enables people to make use of trading opportunities even when they don't have the required funds. Samco offers margin trade funding with the additional feature of zero balance trading. Traders don’t have to maintain a minimum balance in their zero balance demat accounts, which helps them to save their funds.

FAQ's 

• What are the eligibility criteria for NSE members to provide the Marginal Trading Facility? 

NSE has mandated that only corporate members with a net worth of ₹3 crore, calculated as per the Dr L C Gupta formula, can offer margin trading facilities to their clients. Moreover, such corporate members must obtain permission from the stock exchange.

• How is an MTF pledge different from a margin pledge? 

In margin pledges, traders use their existing holdings or portfolio to get additional margins or limits. They can use this extra margin to purchase more shares. On the other hand, shares bought under MTF need to be mandatorily pledged and this is known as MTF pledge. No additional limits are available against these shares, unlike the margin pledge.

• If I purchase shares with MTF, will I still get the benefit of corporate actions like dividends and bonuses? 

Yes, when you buy shares using margin, you will receive benefits like dividends and bonuses. It will be credited to your bank account which is linked to your trading account. 

• What are the different types of margins in trading? 

The different types of margins in trading happen to be initial margin, maintenance margin, variation margin, volatility margin, etc.

• How long can I hold stocks purchased with margin? 

You can hold the shares bought under MTF for an unlimited number of days. All you have to do is maintain the necessary margin daily. Remember that your holdings might get liquidated if the holding coverage falls below a certain point.