If you are great at identifying financial securities that will do well in the future but don’t have enough in your investment portfolio to afford those stocks, then margin trading is an option worth considering.
For traders and investors in the financial market, margin trading is a great way to make money fast. But for newbies like you, still blue-eyed, you might be wondering how you can make a killing from a stock even when you don’t have as much money as you’ll need.
In this article, I will walk you through margin trading and how you can start trading with your broker.
What “Borrowing To Trade” Means
Margin trading is the process of entering a trade with the money borrowed from a broker. It is used when traders and investors spot a stock they believe will rake in the numbers in the future and are willing to bet on the success of the stock(s). For instance, you realize that the stock ABC will rise by 50% in two days. You can borrow money from your brokerage company, which is usually 50% of your balance, and enter a position.
The regulations for margin trading vary across brokers, but the standard laws are based on the country’s Security and Exchange Commission and any other regulatory body authorized in the country.
Important Things To Note Before Starting Margin Trade
Before starting trading, it is important to know certain things, no matter the trading type, be it margin trading or spot trading. Before you start trading margins here are two factors to consider:
- Know the risks involved: The risks attached to trading margins can sometimes outweigh the benefits if not appropriately managed. These risks involve, but are not limited to:
- Losing your investment when the market goes against you.
- Forced to deposit more money into your margin account when the market goes against you. The deposited cash covers your losses and maintains your position on the market.
- Pressured to sell your securities when the value of your stock loses so much value.
- Know the agreement: It is foolhardy to enter into a margin trade with your broker without fully understanding what the broker demands. Too many traders open margin accounts and trade margins without understanding the user rules, first from the national regulatory body and second from their brokerage company.
Common Terms In Margin Trading
- Minimum Margin: The least amount the newly opened account must contain.
- Maintenance Margin: The amount remaining in the account after margin trading. For instance, a trader having $2000 will have 25% as its maintenance margin.
- Margin calls: It involves depositing additional money into the margin account as a result of the initial amount not up to the least amount the account should contain after margin trading.
- Initial Margin: It is the amount of money that the trader is allowed to borrow. Different brokerages have the standard amount they borrow from traders, although the permissible percentage by the Regulation of the Federal Reserve Board is 50%.
How to ‘Horrow and Trade’
There is a need for a broker to open a margin trading account for you before you can start trading on the stock market. Likewise, the account must contain the least required amount for the reading to be feasible. Once you’ve satisfied the two requirements, you can follow the steps below to begin to trade margins on the stock exchange.
- Opening of an account: Although the opening of a margin account is done automatically by some brokerage companies, others do it upon request. After opening the account, you will need to deposit the initial margin after being informed about the acceptable least margin and the percentage rate of interest.
- Pay money into your margin account: When you’ve agreed with your broker on the terms and conditions, you’ll pay the required initial margin fee into your account.
- Start trading: After that, you can enter stock positions with the required margin percentage while maintaining the desired minimum margin on your balance.
- Margin trading has its downside, although trading it can be highly profitable. However, with the proper risk management in place for your stocks, your securities will yield profits.