1. Margin Trading: Introduction
  2. Margin Trading: What Is Buying On Margin?
  3. Margin Trading: The Dreaded Margin Call
  4. Margin Trading: The Advantages
  5. Margin Trading: The Risks
  6. Margin Trading: Managing Risks
  7. Margin Trading: Conclusion

Here’s a summary of the key points covered in this Tutorial:

  1. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.
  2. Margin means the amount of funds contributed to a margin account from your own resources, and is also referred to as your equity.
  3. Margin debt refers to debt that you take on in a margin account.
  4. You will receive a margin call when your equity falls below the minimum threshold set by your broker – also called maintenance margin – which is between 30% and 40% at most brokerages.
  5. Minimum margin means the minimum amount that has to be deposited in your margin account  before you can commence trading; while FINRA has this at $2,000, most brokerages have higher thresholds.
  6. Initial Margin is the portion of the purchase price that you deposit when you buy a security on margin. Since you may borrow up to 50% of the purchase price of marginable securities, according to Regulation T of the Federal Reserve Board, your initial margin will be at least 50% of the purchase price.
  7. Not all securities can be purchased on margin.
  8. In order to rectify the margin deficiency that results in a margin call, you may have to deposit cash or marginable securities in your margin account, or alternately, liquidate a portion of the stocks purchased on margin.
  9. Advantages of buying on margin are that you can leverage your gains by buying more than you could if you were doing so on a cash-only basis; take advantage of trading opportunities; diversify your portfolio; and generate carry trades.
  10. The risks of margin trading are that your losses are amplified; you may have to deal with margin calls and forced liquidation; interest charges on margin accounts can add up; and you have to be extra vigilant in monitoring your accounts and portfolios.
  11. You can partially mitigate the risks of margin trading by avoiding being heavily leveraged; using margin only for short-term, opportunistic trading; using margin for a diversified portfolio; having a risk management plan; and being prepared to think like a trader and take losses. 
  12. Margin trading is best left to sophisticated traders and high-net worth investors who are conversant with its risks. The average investor will be better off investing for the long term in a cash account, rather than trading for the short-term in a margin account.

 

We must emphasize that this tutorial provides a basic foundation for understanding margin trading. It is meant to serve solely as an educational guide, and is not intended to provide advice about trading on margin

 

 

 

 

 

 

 

 

 

 


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