Zerodha, Paytm Money launch margin trading facilities with contrasting strategies

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 a note of caution regarding associated risks, while Paytm Money seeks to woo retail investors with limited-time 1% interest.

In a social media post, Nithin Kamath, Co-founder and CEO of Zerodha, shared his apprehensions about the move.

"I haven't been sure about this product for a long time because of obvious reasons. Customers who trade for delivery tend to ignore the impact of the cost of borrowing, and there's always the risk of the trade going against them, which leads to a bigger loss," Kamath wrote.

Despite his reservations, Kamath acknowledged the mounting demand for MTF among Zerodha's customers and the competitive landscape. "In the last 3 to 4 years, MTF has grown tremendously, with pretty much everyone offering it. Considering the number of customers asking us for the feature, it didn't make business sense for us to not offer it," he added.

Zerodha has clarified that it will not aggressively market the MTF product to avoid encouraging unnecessary risk-taking.

Paytm Money also launched its "Pay Later" Margin Trading Facility, touting a low-cost approach aimed at retail investors. The platform enables users to invest in nearly 1,000 MTF-enabled stocks with a nominal 1% monthly interest rate as an introductory offer valid until March 31, 2025.

"We are committed to simplifying investments and enhancing financial accessibility," said Rakesh Singh, MD and CEO of Paytm Money, in an official statement.

"Our 'Pay Later (Margin Trading Facility)' enhances the purchasing power of investors, especially those looking to increase their exposure to the stock market without committing the full capital upfront," he added.

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Margin trading facility allows investors to buy more securities than they can afford by borrowing money from their broker. Investors only need to pay a percentage (margin) of the total purchase value upfront.

For example, with a 20% margin, you can buy stocks worth Rs 10,000 by paying just Rs 2,000, with the broker lending the remaining Rs 8,000. While this leverage can amplify potential profits, it also magnifies losses.

If the stock price drops, the investor not only incurs a loss on their investment but is also liable to repay the borrowed amount with interest.

If the investment value falls below a certain threshold, brokers may issue a "margin call," requiring additional funds. If not met, they can sell investor's securities to recover their loan.