Margin trading is something that a trader should do in moderation. Given its risks, it should not be a trader’s sole approach to trading. Nor should it be something that a trader does for long periods of time. Once you’ve decided on an exchange and opened an account, you then need to ensure that the account has sufficient funds. Various exchanges will have varying requirements in this respect, and so it’s important to understand this aspect before selecting an exchange. All investing is subject to risk, including the possible loss of the money you invest.
In addition, a customer does not have a right to an extension of time to meet a maintenance margin call. In risk-based margin systems, margin calculations are based on the risk inherent in your trading portfolio. The positions in your account are evaluated, including any hedged positions that decrease potential risk, and based on their risk profile, used to create your margin requirements. The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. The main advantage of margin trading is greater purchasing power.
Weighing the risk
Supporting documentation for any claims, if applicable, will be furnished upon request. A margin agreement, along with higher minimum account balances, are required for certain types of active trading. Learn important requirements, including how to identify and avoid trading behaviors that could potentially have negative consequences and violations.
Be sure to consult your investment advisor and tax professional about your particular situation. So, assume you own $5,000 in stock and buy an additional $5,000 on margin. Your equity in the position is $5,000 ($10,000 less $5,000 in margin debt), giving you an equity ratio of 50%. If the value of your stock falls to $6,000, your equity would drop to $1,000 ($6,000 in stock less Margin Trading $5,000 margin debt) for an equity ratio of less than 17%. One of the biggest myths out there is that millionaires built their wealth by taking big risks with their money. While it’s true that practically all investments come with some risk, millionaires keep their risk and reward ratios in check by sticking with proven, consistent investments with long-term track records.
Borrowing and margin trading
Certain other exchange traded derivatives, such as options on futures contracts, are marked-to-market in the same way. For example, Jane buys a share in a company for $100 using $20 of her own money and $80 borrowed from her broker. You can also often borrow against the marginable stocks, bonds, and mutual funds already in your account. For example, if you have $5,000 worth of marginable stocks in your account and you haven’t yet borrowed against them, you can purchase another $5,000. The stock you already own provides the collateral for the first $2,500, and the newly purchased marginable stock provides the collateral for the second $2,500. You now have $10,000 worth of stock in your account at a 50% loan value, with no additional cash outlay. Brokerage customers who sign a margin agreement can generally borrow up to 50% of the purchase price of new marginable investments .
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