Margin trading facility (MTF) is really for the investors to buy shares and keep a fraction of the total value in their possession while relying on the stockbroker for the rest of the purchase. The increase in exposure is accompanied by an increase in the risk involved. Some young traders, new to the equity markets, find the prospects of margin trading so attractive, but they often miscalculate in minor, avoidable ways because they are inexperienced.
1. Ignoring Margin Requirements and Risk Management
MTF is synonymous with major follow-through errors in margin trading. A classic example of this would be going short of the margin requirement from the start. An initial percentage usually needs to be deposited as margin on an account by a broker. There are always maintenance margin levels, which, if movements in the market are against the trader, trigger a margin call.
2. Depending on Limited Stock Options Without Reviewing the MTF Stock List
Generally, the broker presents a pre-approved MTF stock list across which there are specific stocks enabling margin trading. To join this list, stocks must be fairly liquid and commercially traded, among other defining characteristics set by the regulatory bodies and brokers themselves. The common mistake is entering a trade without checking that the stock is on the approved list.
3. Misuse of High Leverage on Highly Volatile Stocks
Having access to borrowed funds emboldens traders to go for higher exposures on stocks with highly speculative or volatile trades. Though this incident will yield greater returns in some cases, it equally poses a greater risk. Many times, younger traders tend to underestimate how fast volatility acts on price changes in the market and how quickly movements might affect margin requirements and balances as well.
High-leverage trades on unpredictable stocks can give rapid losses without much clear analysis of historical stock prices, volatility indicators, or liquidity levels. Balanced trade sizes should be borne in mind, avoiding very large entries in a specific dangerous stock from the allocation of margin capital.
4. Not Following Interest Cost on Borrowed Funds
InMTF trading, brokers collect interest for the money borrowed by the trader for as long as the position remains open. New traders will only concern themselves with moving stock prices but will not take note of such additional costs. Over periods, such charges would add up and significantly impair total returns.
Interest rates on borrowed funds for margin positions should be frequently compared and taken into the trade plan. They should conduct a review of interest expenses daily or weekly for everyone to know how it stretches their finances whenever they keep leveraged trades for long periods.
5. No attention is paid to real-time position monitoring
With the MTF, every single margin position has to be tracked very closely within daily price movements and continuously varying margin requirements. One of the major errors is that young traders will not keep tracking their live positions, their margin balances, or the alerts from the broker.
Inactive supervision means serious risks from missing important notifications regarding a shortfall in margins, price direction, or changes in margin requirements. Many brokers have live trading platforms and dashboards under which traders can manage and track margin positions for timely adjustments. After regular monitoring, the chances of sudden margin calls or forced closures would be reduced.
Conclusion
MTF is a means for young investors through which exposure via margin trading can be increased. However, inexperience mainly leads to errors such as ignorance of margin, mismanagement of leverage, neglect of interest charges, and lack of awareness of whether the stocks qualify through the MTF stock list.
