Brokerage platforms Zerodha and Paytm Money have launched their respective Margin Trading Facilities (MTF), enabling customers to leverage borrowed funds for stock purchases.
Zerodha has introduced MTF products with caution about the associated risks, while Paytm Money seeks to attract retail investors with limited-time 1% interest.
In a social media post, Zerodha co-founder and CEO Nitin Kamath shared his concerns about the move.
“For obvious reasons I am not sure about this product for a long time. Customers who trade for delivery ignore the impact of borrowing costs, and there is always the risk of trading against them, resulting in huge losses,” Kamath wrote.
Despite his reservations, Kamath acknowledged the growing demand for MTF from Zerodha’s customers and the competitive landscape. “In the last 3 to 4 years, MTF has grown so much that almost everyone has offered it. Considering the number of customers asking us for the feature, it didn’t make business sense for us not to offer it,” he added.
Zerodha has made it clear that it will not aggressively market MTF products to avoid encouraging unnecessary risk-taking.
A few hours later Paytm Money also launched its “pay letter” margin trading feature, targeting retail investors and emphasizing a low-cost approach. The platform enables users to invest in around 1,000 MTF-enabled stocks at a nominal 1% monthly interest rate as an introductory offer valid till March 31, 2025.
“We are committed to simplifying investments and increasing financial access,” Paytm Money MD and CEO Rakesh Singh said in an official statement.
“Our ‘pay letter (margin trading facility)’ increases the purchasing power of investors, especially those who want to increase their exposure to the stock market without committing full capital upfront,” he added.
Margin trading facilities allow investors to borrow money from their broker to buy more securities than they can afford. Investors are required to pay upfront a percentage (margin) of the total purchase price.
For example, with a 20% margin, you can buy a stock worth Rs 10,000 by paying Rs 2,000, with the broker paying the remaining Rs 8,000. While this leverage can increase potential profits, it also increases losses.
If the stock price falls, the investor not only incurs a loss on his investment but is also liable to repay the borrowed amount with interest.
If the investment price falls below a certain threshold, brokers can issue a “margin call,” requiring additional funds. If not found, they can sell the investor’s securities to repay their loan.