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Invest Short Invest Smartly

ICICI Securities 29 Jul 2022

The book – The Psychology of Money states that successful investing, like everything valuable, comes at a cost. Volatility, anxiety, doubt, uncertainty, and regret are all simple to dismiss until you're confronted with them at the moment. What do we do in these scenarios? Do we overpower them smartly or let them destruct us completely?

There is a cost associated to investing and attempting to compound your money. And that price is frequently veiled – you're taken for a ride by Mr. Market's ups and downs. The dread and uncertainty arise from time to time as market conditions change. If you want to invest, you must be willing to pay that small price, especially if you want to invest smartly.

Can you invest less yet smartly? Yes, this type of investment can be done with a feature which is widely known as Margin Trade Funding (MTF).

An omnipresent misconception about investing is that you need a large bank balance to get started. In reality, you can start developing a great portfolio with just a few thousand rupees. This article will take you through our exciting way of smartly investing on a small budget. It will also briefly discuss – Margin Trade Funding (MTF).

What exactly is MTF?

Consider the following scenario: you are willing to buy your dream house worth Rs. 1 crore with lavish balconies and a great infrastructure. And you have only Rs 10 lacs!! Won’t you attempt to buy that house just because it doesn’t fit your pocket? You will pay Rs. 10 lacs and fund the remaining Rs. 90 lacs from any of the lenders (usually banks). Imagine- you are getting to feel, live, and enjoy in the house worth Rs. 1 crore just by paying an initial 10% of the total worth. Of course, you have to pay the remaining funded amount along with some interest, but you are privileged to own something which seemed out of your budget. This is the magic of Margin Trade Funding.

If this scenario were to play out in the stock market, the brokerage firm you deal with would be the one who lends you the money for your dream house, and the funds in your brokerage's Demat Account would serve as collateral for the loan.

Margin trading is a way to buy stocks that you cannot afford. You can buy shares for a fraction of their actual value by paying the broker a small fee. This margin is paid in cash or stock as security. Margin trading is defined as an investor's position in the market with cash or securities. Your margin trading business is funded by your broker. When you close a position, the margin can be settled later. You make a profit when the profit earned exceeds the margin. In this way, short-term investing enables you to trade larger lots to generate returns.

Why invest in MTF?

Customers can purchase stocks with a very small amount and hold them for 365 days. They can use stocks instead of cash as the margin. Moreover, the Balance amount will be funded by the broker to complete the investment. 

The book outlines the profundity of finance. In finance, it's easy to forget that something can be technically correct but contextually incorrect.

Therefore, with leverage, one can optimize their returns with the help of a story. In 2008, a pair of researchers from Yale developed a paper claiming that when buying stocks, young savers should use a two-to-one margin (two dollars of debt for every dollar of their own money) to boost their retirement funds. It suggests that investors reduce their leverage as they get older, allowing savers to take more risk when they're young and can manage a magnified market rollercoaster, and less risk as they get older.

Even when the leverage wiped you out when you were young, researchers found that investors would be better off in the long run if they picked themselves up, stuck to the plan, and kept investing in a two-to-one leveraged account, the day after being wiped out - which is a rational strategy. With MTF and leverage, you can optimize your returns while leading a better life in the future.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose. 

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