In 2019, 53% of American families invested in different stock options.
If you’re interested in getting into trading stocks, you might be wondering what margin trading stocks involves.
Thankfully, we have the perfect guide for you here, so make sure you keep reading!
What is Margin Trading?
Margin trading is when you buy stocks with someone else’s money. If you know what you’re doing, you can multiply your returns by a lot, but you’ll also have a lot of risks.
You may want to work with a broker, like Metatrader 4 Brokers | InvertirEnBolsaWeb.
They’ll help you borrow funds from them so that you can buy more shares than you would have been able to with your own cash. However, the collateral ends up being the shares that you purchase with their money.
While this may sound like a great idea, keep in mind that the losses will also be multiplied, so you could lose a lot of money quickly.
How It Works
For example, if you buy a stock for about $50, and then the price goes up to $75. Normally, you would have a 50% return on your investment.
But if you bought the stock with $25 of your own cash and $25 of your own margin, then you’ll have an investment return of 100%. However, you would also have to include the interest that the broker would get.
On the other hand, if you bought that same stock for $50, and it goes down to $15, you normally would’ve lost 70% of your own money. But if you lose that money on a margin, you lose 100% of it and the $25 investment that you paid with the broker’s money.
You’ll also have to pay back interest and any other fees as well.
You should read your contract with your broker before you invest with them. That’s because sometimes you’ll have to pay extra securities or cash fees in case the stocks fall.
With a cash account, you’ll be assuming all the risks on your own with your own money. You will have a normal rate of returns.
But with a margin account, your losses can also be maximized. You’ll have to evaluate if the risks are worth it to you. You should never invest money that you aren’t able to pay back in case things do go wrong.
You should also keep in mind that the brokerage firm can decide to sell some or all of your securities. They don’t even have to consult you to do that, but they only do this in case you aren’t paying off your margin loan.
If you’re okay with those risks, margin trading might be right for you!
Learn More About Margin Trading Stocks
These are only a few things to know about margin trading stocks, but there are many more factors to consider.
We know that beginner investing can be overwhelming to learn, but we’re here to help you out.
If you enjoyed this article, make sure that you explore our website to find more articles just like this one.