Key Takeaways
- Margin pledge allows you to use any securities in your demat account as collateral.
- MTF pledge is only for shares bought using the MTF facility.
- MTF pledge allows you to keep a lower margin and hold your shares for a longer time.
Before diving into the differences between MTF pledge vs margin pledge lets understand what margin is. Margin refers to the practice of borrowing funds from a brokerage firm to increase the purchasing power of an investor or trader. It allows them to control larger positions in the market with a smaller initial capital outlay. When an individual engages in margin trading, they open a margin/ trading account with the broker, and a certain percentage of the total trade value, known as the margin requirement, is deposited as collateral. This collateral enables the trader to leverage their investment, amplifying both potential gains and losses. The Securities and Exchange Board of India (SEBI) oversee margin trading to ensure fair and transparent practices.
Now let’s understand what margin pledging means. Margin pledge, also known as securities pledge or collateral pledge, is a process where an investor pledges their securities (such as stocks, bonds, or mutual fund units) as collateral to avail margin trading facilities.
There is another term associated with pledging, which is MTF pledge. MTF or Margin trading facility is a compulsory procedure mandated by SEBI. When participating in MTF and purchasing shares, you are required to pledge those shares to maintain your position. This action must be completed by 9:00 PM on the day of stock purchase. Failure to complete this process will result in the automatic liquidation of your shares after a period of T+1+5 trading days.
What is margin pledge?
A margin pledge involves using your existing stocks as collateral with your broker to secure a trading margin. This facility allows you to borrow funds against your shares, which can then be used for various trading activities such as buying more shares, intraday trading, or trading in futures and options. Margin pledges provide flexibility, enabling traders to leverage their portfolio for additional trades without the need for immediate cash. This type of pledge can be utilised with or without an MTF pledge, offering broad applicability for both margin trading facility (MTF) positions and other independent trading strategies.
What is MTF pledge?
The Margin Trading Facility (MTF) pledge is an essential process for utilising MTF, also known as E-margin. This involves pledging stocks purchased through MTF to comply with SEBI regulations. The process starts two days after buying the stocks (T+2 days) when they appear in your Demat account. You receive a notification with a link to the CDSL/NSDL website, where you must enter your PAN/BO ID and select the stocks to pledge. An OTP is sent to your mobile or email to authorise the pledge. There are associated costs for pledging and un-pledging shares, which should be factored into your net profit calculations.
MTF Pledge vs Margin Pledge
When deciding between MTF and Margin Pledge, it's important to understand their distinct features and uses:
| MTF Pledge | Margin Pledge | |
| Meaning | MTF pledge is when shares bought using margin trading are pledged to the broker as collateral. | Margin pledge is when dematerialised shares are used as collateral to meet margin requirements instead of cash. |
| Usability | The MTF pledge is only applied to the shares the trader bought through MTF (margin trading facility). | Margin pledge involves using securities that a trader already own in their Demat account as a form of security. |
| Timeline to pledge | The trader has to promise the shares they bought through MTF before 9 pm on the same day they bought them. | The trader can use their securities as collateral whenever they need to boost their extra limit or margin. |
| Securities which can be pledged | Under MTF pledging, a trader can only pledge securities that have been bought and are Group I securities. | Under the margin pledge, a variety of approved securities can be utilised as collateral, including stocks, mutual funds, sovereign gold bonds, and exchange-traded funds. |
| Charges involved | Changing or making a promise (MTF pledge) for stocks, or undoing that promise (un-pledge), will cost a certain amount as decided by the parties involved, for each company's shares the trader is dealing with, no matter how many shares there are. Also, if the trader directly sells shares that they had promised (pledged), there will be charges for undoing the promise (un-pledge) applied to those shares too. |
The price for putting up stocks as collateral or taking them off as collateral will cost a certain amount as decided by the parties involved, for each set of shares, no matter how many shares there are. Also, if the trader sells pledged shares directly, there will be charges for taking them off as collateral (un-pledging) applied to those shares too. |
Understanding the concepts of margin trading, margin pledge, and MTF pledge can greatly enhance your comprehension of how to effectively manage your investments. The margin trading provides investors and traders with the ability to amplify their market participation, MTF pledge is a requirement set by SEBI, ensures that shares purchased under MTF are pledged to maintain the trading position, and it's crucial to complete this process promptly to avoid the risk of automatic share liquidation.
With the oversight of SEBI, these practices aim to promote fair and transparent trading in the financial markets. As you venture into the world of investing, a clear understanding of these terms will empower you to make informed decisions and navigate the complexities of margin trading and pledging successfully.
Bajaj Financial Securities Limited (BFSL) can be a great platform any investor for securities trading, start your investing journey today!
