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Margin trading explained

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  • Margin trading explained

    In this short post, i'm going to give you a bare bones explanation of margin trading and how it works.

    Trading on margin means trading with borrowed money. For the purposes of this post we'll focus on the margin associated with stocks.
    The benefit of margin trading is that you can make quite a bit more money even if you don't have much cash to put into the market. In the stock market you have two basic margin ratios...4:1 and 2:1. Here's how they work:

    If you have an account and you want to use your 2:1 margin to buy a stock you look at the amount of cash in your account and multiply by 2. Example: An account with $10K cash can buy $20K worth of a stock. The same goes for 4:1. The only difference is 4:1 margin is strictly for day trades. Meaning you have to buy and sell your stock using that margin in the same day. Example: An account with $10K cash can buy $40K worth of a stock.

    When you first open a brokerage account you have the option of having an all cash account meaning you can't use any margin or a margin account which of course let's you borrow funds from the broker. Margin accounts require a small fraction more to start than all cash accounts but most it's still in the low thousands so newcomers don't need to worry.

    In the world of finance, trading on margin is a bit of a touchy subject. Some say its the worst thing you can do and some say it can be helpful if used properly. My personal opinion is that unless you start trading with a huge sum you should be margined to the hilt once you've gotten a few years under your belt. Spend a few years practicing using ALL cash. DO NOT touch margin when you're first starting out but once you have a pretty good handle on things give it a go.

    -Sniper
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  • #2
    Margin trading for the win. Its almost impossible to make any progress without it. Even 2:1 helps significantly.

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