Table of contents
- A Brief on Margin Trading – What is margin pledge?
- An Introduction to MTF Pledge – What Is It?
- Outlining the Margin Trading Facility and Its Features
- The Reasons Why MTF Pledge Matters – Explaining in Brief
- Understanding the MTF Pledge Process – Here’s Everything to Discover
Are you someone young in the stock market universe? Indeed, have your share of time and flexibility to learn from your failures and successes. So, there might be a point in time when you require emergency funds. In such circumstances, you can take a loan against securities owned by you.
Such securities are pledged in favour of the pledgee or lender. Simply put, pledging shares means using shares as collateral to safeguard a loan. Here, the pledged holdings or shareholder offers shares to the pledgee or lender. It is provided as the security for the loan or credit. The shares’ ownership remains with the pledger. This allows them to continue getting dividends.
Before this post gets you through the MTF pledge, you must understand what margin is all about.
A Brief on Margin Trading – What is margin pledge?
So, what is margin pledge? In short, the margin is when investors or traders borrow funds from the brokerage to improve their purchasing power. This allows them to get larger positions in the market with a minimum initial capital outlay.
Engaging in margin trading requires a margin trading account with a broker. One also needs a small percentage of the trading value, known as collateral. Recently, SEBI has made it compulsory for investors to pledge shares they purchase under margin trading.
Suppose the MTF pledge request isn’t placed before the scheduled time on the trading day. In such circumstances, investors won’t be able to hold the position as it gets squared off. That’s where the role of the MTF pledge comes into being.
An Introduction to MTF Pledge – What Is It?
The MTF Pledge is a compulsory practice that the SEBI has imposed lately. Upon purchasing shares under the MTF, the investor must initiate the pledging process. This will help them continue holding their position. As you already learned, the pledging timeline is specified. The bought equity shares should be pledged under MTF before 9 PM on the day of the order.
An investor needs to purchase stocks using the broker’s funds. So, these stocks are pledged under your name.
Outlining the Types
When you sell or buy stocks, the pledge will be closed. Mainly, there are two types of MTF pledges, mentioned in the following points:
- Post-pledge (which is a standard industry practise)
Investors or traders need to buy the order post in the post-pledge. CDSL (depository) sends the pledge approval to the investor on the same day. You must approve that pledge request before 10 AM or the next day. The time may differ from one broker to another.
If you don’t approve the post-pledge request within that time, the order will be covered from MTF to standard delivery. You can be obligated to pay the whole amount on the next day (i.e., T+1). Failing to offer the funds means the position will be squared off. You will also be penalised with 18% of charges.
In today’s age, a lot of new investors do not know the concept of pledging stocks within a given time. But with the pre-pledge solution, you can carry forward the process without hassles.
Here, you must first pledge the stock with the broker and post margin pledge authentication of the request. Upon that, the buy order gets processed. That allows you to refrain from the repercussions of missing out on the approval date.
Outlining the Margin Trading Facility and Its Features
A new investor should be aware of the following top features of the margin trading facility:
- Margin trading helps investors leverage the positions in the securities that aren’t derivatives.
- Authorised banks have the allowance to offer margin trade accounts under SEBI’s regulations.
- According to the SEBI and stock exchanges, securities can also be margin-traded.
- Cash and stocks are also used as collateral for the margin positions.
- An investor who wishes to use MTF needs to open the amount with the brokers. They need to accept the terms and policies to get familiar with the benefits and risks.
- One can carry forward the margin-created position to N+T days. T is the number of days a position gets carried forward, while N is the number of trading days.
The Reasons Why MTF Pledge Matters – Explaining in Brief
Here are the reasons to choose the MTF pledge:
Encashing Price Fluctuations
MTF allows investors to take part in the stock market without cash in hand. Suppose you don’t have cash in hand. In such circumstances, you may consider margin trading for encashing price fluctuations over the short term. It’s beneficial, especially for those who wish to reap benefits from the market volatility.
Using Portfolio Securities as Collateral
Another unique advantage of MTF is that it allows investors to use existing portfolios or the demat account securities as collateral. So, it can mitigate risks for brokers and let investors access funds for trading.
Did you know that an MTF pledge can increase the rate of ROI? MTF pledges that investors can leverage borrowed funds and improve their presence and exposure on the market. But you must note that increased returns come with risks. So, you need to implement some risk management strategies to earn profits in the long run.
Besides, an MTF pledge can improve an investor’s purchasing power.
Understanding the MTF Pledge Process – Here’s Everything to Discover
After executing the trade under MTF, you need to complete the request:
1st Step: NSDL or CDSL sends the MTF Pledge request link to the email address and phone number registered with its depository participant
2nd Step: You need to click on that link to visit the official website of the CDSL margin pledge
3rd Step: Now, you must enter the PAN card number or DEMAT account that will authenticate your pledge request.
4th Step: As soon as the authentication is complete, securities and the amount needed to pledge will be available on the screen. This is in favour of the margin trading account of the broker.
5th Step: Now, you must choose the stocks you want to pledge. After this, you must tap on the “Generate OTP” option. Check your registered email address and mobile number for an OTP sent by CDSL/NSDL.
6th Step: After this, you have to enter your OTP to complete the authorisation process. This will complete your MTF Pledge request.
7th Step: Lastly, you must wait for a few minutes to receive the completion message.
So, you have discovered everything about the MTF pledge in this post. It’s time to understand the basics by reading the following FAQs.
The difference between the MTF pledge vs margin pledge is that the MTF pledge is applied to shares that a trader purchases via MTF. The margin pledge includes securities that the trader owns in the Demat account as securities.
The charge of NSDL margin pledge is ₹500 for each Client Securities Margin Pledge Account. This amount is charged to each participant in one fiscal year.
The CDSL margin pledge charge is 5.5 for each transaction.
Note that pre-pledge is always better than post-pledge. Post-pledge involves pledging the securities before the stipulated time.