Zerodha's new feature lets you borrow money for buying stocks
What's the story
Leading online brokerage firm Zerodha has launched Margin Trading Facility (MTF) on its trading platform Kite.
With the new feature, investors can buy stocks for delivery using leverage, even without having the full amount at hand.
Depending on the particular stock, users can borrow up to 80% of the trade value through this facility.
Usage instructions
How to use MTF on Zerodha's Kite
To use the MTF, users will first have to enable this feature in their Zerodha account.
For accounts with PoA or DDPI enabled, the activation is instant. But, without these features, it may take up to a day.
Placing an MTF order on Kite is easy: users select the MTF option in the order window and once executed, MTF-acquired holdings are marked with an "M" in their portfolio.
Fee structure
Zerodha's MTF: A look at the costs and charges
The money borrowed through Zerodha's MTF comes at an interest rate of 0.04% per day, which is ₹40 per ₹1 lakh per day.
The brokerage is charged at 0.03% or ₹20 (whichever is lower) per executed order.
Other charges include pledge charges of ₹30 + GST per ISIN for pledging (no fees for unpledging) and square-off charges of ₹50 + GST per squared-off order.
Risk awareness
Zerodha warns users about risks of leveraged trading
Zerodha has warned its users about the risks involved in leveraged trading.
The firm stressed that while equity delivery trades enable investors to hold stocks over time, leveraged positions come with daily costs that can eat into profits.
If stock prices drop, users have to either add margin funds or close their positions to prevent further losses.
Strategic move
Why Zerodha introduced MTF now
Kamath admitted Zerodha had been hesitant to launch MTF in the past owing to its risks.
However, he observed the rising adoption of such facilities in the industry and the higher contract values in derivatives.
Kamath said offering MTF was important for Zerodha to stay competitive, as it was the only major broker not offering this feature until now.
Product comparison
MTF vs. LAS: A comparison of Zerodha's offerings
Zerodha also clarified that its MTF comes with a higher interest rate than its Loan Against Securities (LAS) product via Zerodha Capital, its NBFC.
While LAS comes at 11.5%, MTF is pricier due to its higher risk profile as it offers up to 80% margin versus LAS's 50%.
Kamath had expressed concerns over customers ignoring the cost of borrowing and the risk of trades going against their bets in his social media post announcing the new feature.