What Is a Margin Call in MTF Trading? Risks & Examples

Margin Trading Facility is popular because it helps you buy bigger positions with smaller money. But it also brings the risk of a Margin Call in MTF Trading, which every trader must understand before using leverage.

In fact, India’s margin trading boom has raised concerns among market experts that rapid growth in leveraged positions could amplify stress during sharp price corrections, leading to more margin calls and forced selling.

Let's break this down in simple language with practical examples.

Understanding Margin Calls in MTF Trading

The Margin Call mechanism is the most critical risk factor in MTF trading. It happens when the value of your shares falls and your contribution becomes too low compared to the broker's funded amount.

Simple Example

Suppose you buy ₹1,00,000 worth of shares using MTF.

Your margin requirement: 40%
You invest: ₹40,000
Broker funds: ₹60,000

Now imagine the share price drops 10% the next day.

Total value becomes: ₹90,000
Broker's funded amount is still: ₹60,000
Your equity reduces from ₹40,000 to ₹30,000

Your contribution is now less than required, so the broker issues a Margin Call, asking you to deposit more money.

To restore the 40% margin, you may need to add around ₹6,000 extra.

You will usually receive:

SMS alerts
Emails
App notifications

And the deadline is often the same trading day.

Watch Our MTF Explained for Beginners Video

What Happens If You Ignore a Margin Call?

If you fail to add funds, the broker has the right to force sell your shares to reduce their risk. This is known as a forced square-off.

That means:

You may book losses unwillingly
Your long-term investment plan gets disturbed
You lose control over when to sell

This is why traders using MTF leverage should always keep extra funds in their trading account.

How MTF Profits Get Magnified (Using an MTF Calculator)

Many brokers provide an MTF calculator that shows how leverage affects profit, loss, charges, and interest. One detailed example traders use is the Dhan MTF Calculator.

Let's see how returns change in short-term trades.

Example: HDFC Bank Trade (10 Days Holding)

Scenario	Without MTF	With MTF (After Interest)
Stock rises 1%	0.71% profit	1.84% profit
Stock rises 2%	1.71% profit	6.38% profit
Stock rises 3%	2.7% profit	10.92% profit

The reason profit multiplies is because you are controlling larger capital with borrowed funds, while interest cost remains small for short durations.

Why Holding Period Matters in MTF?

MTF is most beneficial for short-term trades. Why?

Because interest is charged daily on the borrowed amount.

10-day trade → Interest is low → Profits magnify
60-day trade → Interest increases → Profit advantage reduces
Long holding → Returns may become lower than normal investing

MTF works best when you capture quick price moves.

How Losses Get Dangerously Amplified

Now comes the part most traders ignore - loss magnification.

Same Example, But Stock Falls

Scenario	Without MTF	With MTF
Stock falls 1% (10 days)	-1.34%	-7.47%
Stock falls 2% (10 days)	-2.29%	-11.8%

If the holding period increases:

2% drop in 1 month → 14% loss
2% drop in 3 months → 21% loss

Losses grow faster because:

Your capital is small
Borrowed money stays constant
Interest keeps adding

Conclusion

MTF trading can amplify both profits and risks, which is why understanding the Margin Call mechanism and using an MTF calculator are equally important. While leverage may boost short-term returns, falling prices can quickly reduce your margin and trigger a margin call, forcing you to add funds or face forced selling. At the same time, calculator examples show how interest and holding period affect real profit and loss.

Before using MTF, always evaluate the trade with a calculator and ensure you're financially prepared to handle a margin call without panic.