Tag: margin trading

  • Is trading stocks without margin a better choice?

    Is trading stocks without margin a better choice?

    Is trading stocks without margin a better choice?
    Trading stocks with margin can help you increase profits, but it can also increase losses. You can end up losing even more than what you invested. 

    By Guy Avtalyon

    Before we analyze why trading stocks without margin could be a better idea for you, let’s see how you can trade without margin. I think it’s a proper way and order.

    Let me explain to you one important thing. Nothing is wrong with trading on margin, it can increase your profits, but you have to be a very disciplined and skilled trader if you want to do that. Margin trading can increase your losses if you misuse it or use it at the wrong time. For example, it’s completely wrong to trade on margin if you’re greed or desperate. Honestly, trading stocks without margin could be a better idea for you.

    What are your options for trading stocks without margin?

    Of course, if you’re a day trader or want to become that, margin trading might be the only choice. But even then, you can trade stocks without margin, and here are some tips on how to do that.

    It is allowed to have four trades per week (three trades per five days is the PDT rule), and you can still avoid the brokerage firm to tag you as a day trader. For example, if you have sufficient cash, you don’t need a margin. Meaning you don’t need to borrow money from your broker. You need to open several accounts, for example, four with a balance of $6,000. That will give you a chance to place 16 trades per week.

    For me, it’s absurd, but you might be able to maintain four accounts every day. In my opinion, it’s too many accounts to manage at the same time. But, who knows, maybe you’re capable of doing so. There are some other possibilities, but I wouldn’t waste your time on them as they are not working in reality. 

    What is essential in trading stocks without margin? 

    Keep in mind; you do not need to make it all in one day. Instead, think about trading stocks as a permanent and long-lasting job. Let me explain to you one idea. Let’s say you have a $25,000 account and want to use that cash for trading stocks? I can hear your question: Why should I trade $100,000 if I can use the full advantage of $400,000? How can I earn? 

    So, you may think it’s a stupid idea. Just read the rest of this post, and at the end of it, we’ll be on the same page.

    I want you to honestly ask yourself the question: Why do I want to earn quickly? No, you don’t need to tell me. Just be honest with yourself. Why is it so hard for you to recognize time as an advantage? Can you trade slower? Of course, you can!

    Trading with cash carries a lot of advantages.

    For example, it gives you a chance to become a moneymaker, and I’ll show you how to do that. You’ll become one of 10% elite traders.

    Without any doubt, trading stocks with a margin when the market is going against you is the most stressful situation. Let’s say you’re holding a long position on the stock with a 60% cash requirement. At the same time, you hold two more positions that also go against you.

    What are you going to do? Get panicked? Are you confident with your stop-loss orders? Will you stick with them? Are you going to follow and respect your strategy?

    If you’re trading for some time, you noticed the markets fall faster than they go higher. It’s fear. The fear can shift into a panic very fast. What could get you more pain in such circumstances is a margin. Your hard-earned profit could quickly vanish in minutes. Instead of holding a position, it’s much better to sell winning stocks and exit with profit. 

    Also, brokerages will never give you money for free; they will charge you interest. They are profiting from lending you cash. So, that’s the reason why they will always offer you to trade stocks with margin. What is best for you to do is to decline such an offer. If you’re honest enough, you will never find a reason to put yourself in a situation to pay interest and have more losses. 

    You’ll end up in debt. Instead, put some more effort into earning cash and trade stocks without margin.

    Can you trade stocks without margin?

    You can trade stocks without margin only if you have enough capital to open trades. In other words, you must have a sufficient deposit on your trading account. 

    Trading with margin can be dangerous for beginners. But the fact is that the PDT rule isn’t implemented in cash accounts. That’s the point. If you use your cash account, you can make as many trades as you want, but the catch is that it has to be settled cash. But it isn’t a problem necessarily. If you treat trading stocks as a long-term job and not a quick profit scheme, your cash account provides you a straightforward way to make money from your trades. Also, one of the advantages is that you don’t need to worry about PDT. Sounds fair enough.

    Trading tricks 

    If you don’t have $25,000 to trade stocks, you still have alternative trading strategies. I’ll be honest with you, and they are far from perfect. One is to have four trades per week instead of three trades in five days. Also, you can trade stock on the foreign markets. After you do some in-depth research, I’m sure you’ll find the differences and benefits. You’ll find the market that fits your trading needs.

    You might also choose swing trading to enter trades that you can hold for longer than one day. This way isn’t a classic trick, it’s more strategy, but it’s a good opportunity for the traders who can’t meet the $25,000 requirement. 

    Also, you can open more than one account with different brokers. You’ll trade small and produce smaller income, but you’ll have more trades and the possibility to earn practically more.

    Frankly, all these tricks are far better than the trading stock with margin.

    Let’s say you have $15,000 in your margin account, and you want to buy a stock that costs twice more than you currently have. Your broker is willing to give you a margin. After you buy stocks worth $30,000, you’ll own them, but also, you’ll owe your broker $15,000. You’ll make a profit if the stock price increases. Your profit would be bigger than if you bought stock with your money, that’s true. But if the price decreases, your loss would be more significant with margin trading than if you purchased stock with cash.

    Anyway, borrowing from brokers isn’t always straightforward; borrowing from brokers is as binding as banks.

    Can you see why trading stocks without margin is a better choice?

  • Margin Trading Definition

    Margin Trading Definition

    2 min read

    Margin Trading Definition
    Margin trading isn’t without risks involved, so pay more attention to it

    Margin trading is simply the process where investors buy more stocks than they can afford to. It also refers to intraday trading in India and various stockbrokers provide this service. It can increase your profits on the upside, but also expand your losses on the downside. Margin trading means buying and selling stocks or some other assets in one single session. This process requires a trader to guess the stock change in a particular session. It is an easy way of making a fast buck. It is now accessible to even small traders.

    What is margin trading?

    Margin trading is also called buying on margin. It is a method of buying shares that involves borrowing a part of the sum needed from the broker executing the transaction. The collateral for the loan is normally securities in the investor’s account. The trader has to deposit an initial amount of cash or securities into a margin account with the broker. And has to keep a minimum amount of cash or securities in the account as collateral. If the balance of a margin account falls below the minimum maintenance amount, the broker makes a margin call to the trader for the funds needed. Margin balances can be adapted to follow market values by adding or subtracting variation margins.

    What is buying on margin?

    Buying on margin gives the investor leverage as any capital appreciation or dividend income is on the total amount purchased. Even after the amount borrowed has been repaid to the broker, with interest, the investor could still be better off than if he/she had personally financed the purchase of a smaller amount of shares. That depends on how much the shares gain and how much they yield. There are some risks with margin trading – if the shares fall in value, the investor suffers a capital loss while also facing potential margin calls from the broker.

    An example of margin trading

    Margin trading is meant for traders who are looking for a simple way to increase their earnings. And also, they have a reasonable level of risk appetite but do not have enough capital.
    Let’s say you are 100% bullish for the big company and believe the stock is going to pick up.  You want to buy 1000 shares of that company and each share is priced at $200. You would need a capital amount of $200,000 to enter that position.
    Assuming you have $150,000 and want to borrow the rest of the capital. With margin trading, your broker can help you with the rest of the funds while charging you a specific interest percentage.

    How does margin trading work?

    The whole process is quite simple. Margin trading is legal buying stocks or other securities, but instead of your own money, you borrow it from your broker.
    Think about buying stock on margin as buying a house with a mortgage. A margin account provides you the financial support to buy more stocks than you can currently afford. For this purpose, the broker will lend you money to buy shares and keep some amount as collateral.
    If a trader wants to trade with a margin account, the first requirement will be to request a broker to open a margin account. This requires paying a specified amount of money upfront and in cash. That is so-called the minimum margin. If a trader has a losing bet and ends in losses, and fail to pay the debt, the broker will get it out from the margin account.
    When you open the margin account, you’ll have to pay an initial. This is a specific percentage of the total traded value and pre-determined by the broker. Before you start margin trading, you need to keep in mind these important steps.
    First, you need to secure the minimum margin (MM) through the trading session. The reason behind this: if the stock is very volatile, the price can fall more than you had expected.
    Second, the broker has the right to ask you to increase the amount of capital you have in your margin account. Also, the broker has the right to sell any of your securities if feels its own funds are at risk. The broker can even sue you if you don’t fulfill a margin call or if you are carrying a negative balance in your margin account.

    Margin trading if the stock price goes up

    This is the best outcome for you.  Let’s do some math (I adore math).

    Say you bought 100 shares for $4000. But you had $2000 and broker loans $2000. If the price goes to $50 per share, your investment will be worth $5,000. Your outstanding margin loan will be $2,000. If you sell, the total proceeds will pay off the loan and leave you with $3,000. Because your initial investment was $2,000, your profit is a solid 50%. Your $2,000 principal amount generated a $1,000 profit. However, if you pay the entire $4,000 upfront without the margin loan your $4,000 investment will generate a profit of $1,000, or 25 percent. By using a margin, you could double the returns.

    The stock price fails to rise

    If the stock stays at the same price, you still have to pay interest on that margin loan. You are in a better situation if the stock pays dividends because that money can pay some of the costs of the margin loan if not all. In other words, dividends can help you pay off what you borrow from the broker.

    Margin Trading 1
    When the stock doesn’t change in price it is a neutral situation, but you’ll pay interest on your margin loan for each day. Margin trading can be a good plan for traditional investors if the stock pays a high dividend. Many times, a high-payed dividend, for example, $5,000 worth stock, can exceed the margin interest you have to pay. For example, if you had $2.500 and you borrowed the other $2,500, which is 50% of stock’s value. But you expect to receive $3.000 as a dividend, so you’re safe.

    Margin trading when the stock price goes down

    If the stock price drops, buying on margin could work against you. What if the price in our example goes to $38 per share?
    The market value of 100 shares will be $3.800. So, your capital will shrink to just $1,800 because you have to pay your $2,000 margin loan to your broker. This isn’t real trouble at this point, but you should be cautious. The margin loan is 50% of your investment. If it goes lower, you may get the margin call. The broker will demand you to keep the ratio between the margin loan and the value of the securities the same as it was when he lends you money. That’s why margin trading can be very dangerous.

    How to maintain the balance in margin trading?

    When you buy stock on margin, you must maintain a balanced ratio of margin debt to equity of at least 50 percent. If the debt portion exceeds this limit,  you’ll be required to restore that ratio by depositing either more stock or more cash into your brokerage account. The additional stock you deposit can be from another account. If you can’t come up with more stock, other securities, or cash, you have to sell stock from the account and pay off the margin loan. For any trader, it means having a capital loss. For you also, because you lost money on your investment.

    The bottom line

    As you can see,  the margin can increase your profits on the upside but also increase your losses on the downside. If your stock drops drastically, you can end up with a margin loan that exceeds the market value of the stock you used the loan to buy. In the bear market of 2000, for example, many people realized stock losses. The majority of these losses came as a consequence because traders did not manage properly the obligations associated with margin trading. To avoid this kind of problems you must have sufficient reserves of cash or marginable securities in your account.
    For example, buying dividend yields that exceed the margin interest rate could be the right choice so the stock could pay for its own margin loan. Just keep in mind to set up your stop-loss orders. Your goal is to make money, and paying interest could eat your profits.