Trading on Margin – Double the Risk, Double the Reward

When you have a trading account with margin power that means you can buy more stock than you can actually afford because your brokerage is essentially lending you money on top of what’s in your account.

I think people tend to learn best with an example so an example of trading on margin is what I will share with you in this article.

Example: “Joe.”

Let’s say that “Joe” has $2500 in his trading account but it’s been approved for margin trading so that he has twice the “buying power.” This means he actually has $5000 in buying power.

This means that Joe can purchased 500 shares of a stock priced at $10 instead of $250! This essentially means that both his risk and his reward are doubled.

If the stock goes down to $9 and he sells it then he’s out $500 instead of just $250. This means that this 10% loss actually translates to a 20% loss in his account’s value. This a simple illustration of what I mean by double the risk. An extreme example would be: What if the stock goes down 50% (down to $5.) In this case Joe wouldn’t only be out half his money, he’d actually be out all of his money! Please visit:- fx사이트

On the other hand what if the stock goes up to $11? Instead of making $250, he would make $500! It’s the same principle, just the positive side of it. This 10% gain in the stock’s value would translate to a 20% gain in real profits.

To keep this example simple, I’m ignoring the price of commissions.

Margin Interest

This example doesn’t include the cost of margin interest. No, your broker won’t let you borrow money for free! They are getting something out of this deal, interest. The more money you have in your account the lower the interest rate will be. It will most likely range between 4.5% & 8% (over a year.) The math on how much this adds up to is pretty complex but if you are doing quick trades (where you aren’t normally holding for more than a day or two) then it shouldn’t add up to very much.

Other Rules

There may be limits on which type of stocks you can buy with margin power. For example my broker won’t let me use margin trading on any stock priced below $5.

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