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.
InvestingWhen an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
InvestingInitial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
Financial AdvisorInvesting on margin can be profitable but it's a risky play that needs care.
Financial AdvisorA maintenance margin is the minimum amount of equity that must be kept in a margin account.
Financial AdvisorFind out why a margin call is so important to investors.
Managing WealthHow to determine if the amount you clear dovetails with the competition.
InvestingFind out how it provides futures and commodity option strategists with more bang for their margin buck!
Financial AdvisorFind out exactly what margin is and why it's important.