Candlestick Trading Blog
June 21, 2009
Margin Buying
| Margin Buying Introduction Margin buying provides a great opportunity for stock investors to make huge profits using less money. It is a very common trading strategy that greatly increases a stock traders buying power but it must be used with great caution and knowledge since it also comes with very high investment risk. A trader's success depends on many factors but these factors are very manageable as long as you take the time to educate yourself and have discipline in your trading. Margin buying allows the stock trader to spend more money that he or she actually has. The trader must put down a certain amount of money to be used as collateral and then he or she borrows money from their stock broker to make up the difference for the total cost of the stock that is being purchased. Again, margin trading is a great way to make a lot of money off of a pretty small initial capital. There are some basic terms that investors will come across when learning about buying stocks on margin. These terms are explained below. Margin Account – this is a type of trading account where stocks can be purchased for a combination of cash and a loan when margin buying. The investor must deposit a minimum balance of about $2,000 to $5,000 into the margin account initially. This is to serve as collateral against what he or she borrows from the broker, and then the owner is asked to either sell a portion of the stock or add more cash if the value of their stock drops sufficiently. Margin Call – a margin call is a demand for additional funds due to adverse price movement when margin buying. This is what happens when you get a call from your broker to add more funds to your account when the value of the stock decreases sufficiently. Margin Rates – margin rates are the interest rate charged on a margin account and it varies from one broker to the next. While it is typically tied to the prime interest rate, it usually ranges from 6.5% to about 10%. Of course you can find lower rates if you go with a discount broker as opposed to a full service broker. There are many advantages to margin buying such as increased buying power with less money, more profit with less invested, and a trader can borrow up to half (50%) of his purchasing price as initial margin. This type of stock trading is more suited more those traders who have a lot of experience and/or trading knowledge. This is due to the risks that are associated with trading on margin such as the fact that you have to payoff interest on margin, you lose big when you lose, trader have much less control with falling stocks prices. Just be sure that you do your homework, have a trading plan, and that you trade with discipline when trading on margin. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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