Are you looking to increase your financial leverage to trade stocks but do not have in hand money at the moment? Stock trading through the margin facility is the solution you can opt for.
Margin trading facility for stocks enables you to purchase a large position of stock by paying only a portion of the total transaction. All you have to do is pledge your existing investments or cash balance in the margin account. You can leverage this collateral and can use it to trade. A margin trading facility boosts purchasing power.
Want to know more about margin trading and what happens when you trade on margin? This article is for you. Let’s get started.
5 Things That Happen When You Trade on Margin
Everything comes with advantages and shortfalls, and so does margin trading. Here are 5 things that can happen when you use margin for online stock trading.
You Get to Take Leveraged Positions
A margin trading facility allows you to purchase volumes of stocks with a small sum of money, thus increasing your financial leverage. While you make a partial payment for the trade, your broker funds the rest. It gives you the advantage of taking larger positions than you can otherwise afford.
You Can Maximize Your Returns
When you borrow money to make trades, you are increasing both your purchasing power and base capital. Thus, when you buy stocks with a margin trading facility, you enhance your scope for generating higher returns. In other words, you can amplify your gains as the stock price goes up.
You Will Need to Manage the Risk
Like all forms of trading and investing, a margin trading facility also comes with its risks. If you invest too much money in a stock and if that stock declines in value, you stand to lose your capital and borrowed funds in margin trading. However, you can manage the risk using tools such as stop-loss, where your stocks will be sold automatically as it drops to a certain price point.
You Have to Consider the Interest
When you borrow money from a margin trading facility to buy stocks, you will be charged interest on the borrowed fund. The exact amount of interest depends on your online trading platform.
You Have to Maintain Margin Requirements
If the balance in your margin account falls below the required level, you will receive a margin call. A margin call is a request from your broker for you to maintain the minimum margin requirement in your trading account. You can either deposit more funds or liquidate your positions to maintain the required balance.
These are some of the factors you need to consider while using margin trading facilities for stocks. Even though it is a rapid way to boost your purchasing power, you should know how to manage your risk and choose the right platform. So, do your research well before making a decision.