Margin Trading

Tips on margin trading that can help produce huge profits if managed correctly.  Ah, margin trading – should you, shouldn’t you? There’s more here than you might at first think. I’m going to explain it for you. Before you trade on margin, you better know what you are doing, or you’re in for an unpleasant eventual surprise.

  • What is Margin Trading?

Simply put, it’s borrowing money from your broker. It’s a way that allows you to buy more than you have the funds to do so in your account. Of course, you have to pay back what you borrow, with interest. And because you can trade more, you’ll be paying more in commissions. The broker is not going to lose anything, is he? There are different rules with different brokers, but generally you can borrow up to 50% of the purchase price of your trade.

Using Other People’s Money (OPM) is Known as Margin Trading

Margin trading calls for short-term investing methods. You can hold your loan open so long as you have funds to cover your borrowed amount, but sometimes your profits will be eaten up in interest. And remember, your broker will always get paid first when you close the trade. It’s vital you pay attention to what is going on.

  • What Do I Need to Margin Trade?

Well, of course, first of all you need a margin account to get started in margin trading. It’s more involved than a regular trading account. You have to apply and be approved, and that means supplying required personal information, including authorization for a credit check. Once you are approved you can begin, but once again, understand what you are doing.

This is a good introduction to margin trading.

  • How Much Do I Need To Trade On Margin?

You can margin trade with as little as a $2,000 margin account, but how long is that going to last you? This minimum margin doesn’t leave much room to develop and work your strategies. Remember that the purpose is to invest your money – not to gamble, so use proper risk control when margin trading.

  • Margin Call

A maintenance margin is the minimum amount you must keep in your margin account. Below that and your broker will request you make a deposit or liquidate some of your position in order to pay down your loan. That’s what is known as a margin call when margin trading.

  • Examples of Margin Trade

Okay, you open your margin account with $5000. Rules say you now have the ability to buy $10,000. Let’s say you buy $2500 of a stock, you have $2500 remaining in your margin account, right? You didn’t borrow any funds and all is well and you work your trade.

But if you were to buy $7500 worth of a stock, you now have borrowed $2500 and you are in a margin trade. You will pay interest on that $2500 and if your position makes a profit, you exit when ready and pay back your loan and interest. Once again, all is well.

Margin Trading Benefits Experienced Investors Who Understand Risk Management

But if your trade loses enough, you will receive a margin call. And, let me tell you from personal experience, they mean what they say. If you ignore or procrastinate from following the directives of that phone call or email or however they notify you, you will wake up one morning and find your position has been closed and your account balance is zero and no more margin trading for you. You might have been in a trade you felt that, given enough time, would have made you a tidy profit, but because you didn’t deposit additional funds to your margin account when you received that margin call your stock was liquidated and your trade closed. Your broker is not going to lose anything.

Do you see why a small $2000 initial margin account is not enough to realistically trade anything? You can loose your caboose in a big hurry.

As with all investing efforts, it’s important to educate yourself and understand how margin trading works, especially before crunch time comes and you have to quickly make a move.

“The desire to win is useless without the will to prepare.” — Gordon Wood

There are good ways and bad ways to leverage your money. Be sure to spend the time necessary to understand the risks involved and by doing so you just may be able to propel your gains through margin trading.

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