Advantages and Risks of Margin Trading

The advantages of margin trading, of course, have to do with profit. Since margin trades allow you to invest more, they allow you to profit more - sometimes much more. Since most margin accounts do not demand that you pay back your loan right away, you can keep enjoying more investment money that you could otherwise afford.

The main risk of margin trades is that the money you are lent relies heavily on the securities you own now. If the market takes a downturn or your stocks drop in value, you will suddenly own more than you have. Plus, the amount that you can borrow will drop as the stock values drop. If there is a bear market or sudden downturn, your broker may demand that you add to your margin account or may ask for some of the borrowed money back. If you cannot pay, some of your existing securities may be sold - even at a loss - to pay your debts. If securities start climbing again, you will have lost more money since your stocks were sold so cheaply.

Tips for Trading On Margin

Margin trading can work, but only if you approach it smartly.

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You should only consider trading on margin if you are an experienced investor. You should also only borrow money that you can afford to lose. To keep your securities safe, you may wish to have the amount borrowed stashed away in a savings account. That way, if your broker calls back some of their loan, you can always repay the loan and save your securities. You will also want to borrow less than the full amount your broker offers - borrowing 25% of your current portfolio value is always safer than borrowing a full 50%.

Margin trading is an attractive option because it lets you invest more money and potentially experience greater profits. However, it is a little like borrowing money to start a business - if your business fails, you will still be responsible for the loan with interest. Margin trades are even more risky because the value of stocks can so easily dip, causing considerable panic. If in case you have borrowed money you really cannot afford to borrow. If you do decide to try this stock market possibility, be sure to select a good broker and stick to common-sense margin trading strategies that will lower your risks while maximizing your potential profits.

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