MTF vs Loan Against Shares - How Do They Differ?

Did you find yourself eyeing a hot stock but didn’t have enough funds to buy it? Or maybe you needed funds urgently but didn’t want to sell your shares? Don’t worry, we’ve all been there. It’s in these situations that margin trading facility (MTF) and loan against shares (LAS) can help you out.

What is MTF?

MTF is a facility whereby you pay a certain portion of the funds required while your broker funds the shortfall. Amplifying your buying power, MTF allows you to take a larger position than you would normally do with your funds. It’s like shopping with a credit card where you get to enjoy the benefits upfront but need to repay later. Here’s how MTF typically works:

• You put in some of your own money as margin
  
• The broker lends you the rest to buy more shares
  
• You pay interest on the borrowed amount
  
• You sell the shares later, hopefully at a profit, and return the borrowed money
  

Sounds great. However, there’s a catch. If your stock price drops and money in your account falls below the minimum threshold set by your broker, you may receive a margin call. Here, your broker asks you to put in more money, and if you fail to do so, your broker can sell your shares to recover the amount lent.

What is a loan against shares?

If MTF is like a credit card, a loan against shares is more like a personal loan using your stocks as collateral. Instead of selling your shares when you need money, you pledge them. Here’s how it works:

• You pledge your shares to the lender
  
• The lender gives you a loan, which is a certain percentage of the share value
  
• You pay interest on the loan amount as per the agreed terms. The shares remain pledged until you fully repay the loan
  

MTF vs Loan Against Shares: Key Differences

The table highlights the differences between MTF and loan against shares on various parameters:

What to opt for?

You can opt for MTF if:

• You’ve an aggressive trading style and you are confident of short-term price surge
• You feel comfortable in handling risks and margin calls

You can opt for loan against shares if:

• You prefer lower risk
• You want flexibility with the available funds

Conclusion

Both MTF and loan against shares have their pros and cons. It all boils down to your risk appetite and financial needs. If you’re a trader looking for quick gains, MTF might be your thing. But if you want cash without selling your investments, you can opt for a loan against shares.