6) Margin Trading: Conclusion
Margin trading can be compared to a gamble. It’s either you make lots of money, or lose all of it. But, usually the odds are not in your favor.
These are the highlights of this tutorial:
- Margin trading, or buying on margin, involves borrowing money from a broker to increase your buying power in purchasing stock.
- The initial investment required to open a margin account is at least $2,000 (minimum margin).
- You can borrow up to 50% of the purchase price of a stock (initial margin).
- A minimum amount of equity in your margin account is required, and this can range from 25% – 40% (maintenance margin).
- Marginable securities act are made as collateral for the loan. Interests have to be paid, like any other loan, but it can be charged to your account.
- Not all stocks can be bought on margin.
- A margin call happens when the equity in your account falls below the maintenance margin.
- When a margin call happens, you have to add more funds to your account or sell stocks to pay off the debt.
- Your securities may be sold by the brokerage without first consulting you.
- Margin is leverage.
- If executed properly, you can profit a lot from margin trading.
- Buying on margin is extremely risky. You can lose more than your original investment.
- Margin trading is not for the beginners.
This tutorial is meant only as an educational guide and not as an advice for margin trading.