What is meant by margin trading?

Margin trading entails t to buy new securities, get overdraft protection, access credit, or short sell securities .This is made possible by pledging the securities that you already own. This article deals with:

• What is margin trading?
• Why margin trading is said to be an attractive option?
• Is it possible to take advantage of a bull market by means of margin trading?

Margin trading entails t to buy new securities, get overdraft protection, access credit, or short sell securities .This is made possible by pledging the securities that you already own. Since margin trading strategies can be risky - especially the newly-popular day trading margin techniques which allow investors to leverage securities that they own for less than a day - most financial experts do not suggest that inexperienced investors try trading on the margin.

It might be easier to illustrate them with the following example. Let's say that you have $10 000 to invest in 250 stocks. You trade on margin, and you can buy up to $20 000 in stocks, or 500 shares, since your broker lends you $10 000 on the strength of the securities purchased with your own $10 000. If over the course of a month your securities rate is about $25 000, you gain 50% minus the interest on the $10 000 you borrowed to buy the stocks. In this example, trading on the margin allows you to invest more and so to realize larger profits faster. Of course, the risk is that if your shares drop in price, you might lose not only the amount borrowed, but you might need to liquidate some of the stocks purchased with your own money to pay off the debt. Online Trading on the margin can help you increase your profits, but it will also increase or double your losses when stock prices drop.

The Strategies of Margin Trading

Today - many brokers offer special margin accounts to investors which make margin trading as simple than using any other form of credit. To set up this type of account, you will need to be creditworthy and you may need to show a basic level of market knowledge (this is to protect the broker from bad investments made with borrowed money). You will need to make an initial deposit in your margin account. Some brokers ask for a minimum deposit of $2000, while others ask for other amounts. The more you deposit, the more you will be able to borrow. In general you will not be able to borrow more than 50% of the amount you have invested yourself initially. Once you make your initial deposit, the broker will usually match your dollar value. For example, when you give your broker $2000 for a margin account, the broker will offer you $4000 for trading, and you will then proceed to buy securities as you usually would through your broker.

How Margin Trading Increases One's Purchasing Power

Margin trading allows you to take advantage of a bull market or a good stock by giving you the money you need to invest more. If you can only invest a few thousand dollars initially, margin accounts allow you to double what you can invest, which gives you the potential to double your profits. Some flexible margin accounts even allow you to borrow against your securities, so that you can use the borrowed money for your other financial needs. Basically, whatever you invest in a margin account, you suddenly have access to more than that amount for your needs.

Continue to : Advantages and Risks of Margin Trading

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