Here's the bottom line on margin trading:
You are more likely to lose lots of money (or make lots of money) when you invest on margin.
Now let's recap other key points in this tutorial:
- Buying on margin is borrowing money from a broker to purchase stock.
- Margin increases your buying power.
- An initial investment of at least $2,000 is required (minimum margin).
- You can borrow up to 50% of the purchase price of a stock (initial margin).
- You are required to keep a minimum amount of equity in your margin account that can range from 25% - 40% (maintenance margin).
- Marginable securities act as collateral for the loan.
- Like any loan, you have to pay interest on the amount you borrow.
- Not all stocks qualify to be bought on margin.
- You must read the margin agreement and understand its implications.
- If the equity in your account falls below the maintenance margin, the brokerage will issue a margin call.
- Margin calls can result in you having to liquidate stocks or add more cash to the account.
- Brokers may be able to sell your securities without consulting you.
- Margin means leverage.
- The advantage of margin is that if you pick right, you win big.
- The downside of margin is that you can lose more money than you originally invested.
- Buying on margin is definitely not for everybody.
- Margin trading is extremely risky.
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