Buying on margin.Buying on margin can be a great way to get leverage in the stock market. Fist let me ask you a question. How fast do you think you can turn $1000 into $2000? Not that fast that is a 100% increase. Now, how fast can you turn $2000 into $3000? It is a lot easier, that’s only a 50% increase. Every broker will have a different interest that they will charge. Contact your broker to see how much your interest is before trading. It is an important factor you have to factor into your trading. If you can’t pay it off don’t trade with it. The other thing you will have to worry about if you have a small account is margin calls. If your account gets under a certain cash level your broker may get worried about your ability to pay them back. They will give you a few days to sell a stock in your account to pay them back. Advantages and Disadvantages of Using Leverage The biggest advantage of using margin when buying a stock is simple that you get more of a return when you are right. If you can borrow 50% of the price of the stock when trading you automatically double your return. Of course this disadvantage of using so much leverage is that you can lose more money when you are wrong. Also you have to pay interest on the loan as well, so if you are wrong it can be a double wammy. For this reason it is better to only trade on margin if you are confident about your ability to make money from the market and know how to manage your risk. |
