Margin Trading: Understand the Risk

Margin trading is something that is definitely not for the faint of heart. While it can substantially increase your gains, it can also increase the amount of risk that you are taking on. Here are a few things to consider about the risks of margin trading.

Margin Trading

Margin trading is essentially borrowing money from your stockbroker in order to increase the amount of stock that you can purchase at one time. Whenever you purchase stock with margin, you are going to be paying interest to the stock broker. When you increase the amount of stock that you are buying, you could potentially amplify the losses in your account. When you lose, you are going to lose much bigger than normal.

Example

Let's say that you have $10,000 to invest. You use this $10,000 and your broker gives you another $10,000. This means that you are investing $20,000 at once. You decide to purchase a stock that is worth $10 a share. This means that you have 2000 shares. While your trade is open, the value of the stock plummets to $5 per share. This means that the value of your account is now $10,000. At this point, you will have to give the $10,000 back to your broker and you are left with nothing. If you had only used the money in your account, you would still have something left to trade with.

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