Let’s take a look at some key considerations. In a margin account, your positions will dependably be more delicate to everyday market changes, and if there is an extremely sharp decrease, you could wind up losing more than the aggregate estimation of your account.
Additionally, you are always required to maintain a minimum level of equity in a margin account usually about 30% to 35% for most stocks. If your securities should start to decline in value, and fall below this level, you will be required to deposit additional money into your account. If you are either unable or unwilling to do this, your broker can closeout the securities in your account to increase your equity. Unfortunately, when this happens, it could be at the worst possible time and at the worst possible price and the risks don’t end there.
If your positions lose value too quickly and your margin loan balance exceeds the proceeds from the securities your broker closed out, you could end up with no securities at all, but still owing money. On the upside, when you trade in a margin account, you can commonly acquire half of the cost of any new securities. That means you can buy up to twice as many shares as in a cash account, and this might let you take advantage of short-term market opportunities without selling any of your existing positions.
It can also make it easier to diversify your portfolio if you are overly concentrated but you don’t want to sell any of your holdings. Your potential loss is limited to the amount you have invested. Since you own your securities outright, you get to decide when, or if, to sell them. You won’t be compelled to offer them amid horrible market conditions because of a margin call.
But if you only trade in a cash account, and the stock you buy goes up, your profits will usually be less than if you traded in a margin account and bought more shares. Always remember that this is a loan and you will incur interest charges. Whether your trades end up being profitable or not, eventually you will have to pay back the loan, plus margin interest charges.
There is no set repayment schedule on a margin loan, instead, when the loan is paid in full when the securities are sold. Trading on margin can increase your gains if you make good investing decisions, but it can also increase your losses when you don’t. In the event that you feel like margin exchanging may be ideal for you, it’s anything but difficult to begin.
When you open an investing account with a broker, unless it’s an IRA or some other type of retirement account, you’ll usually be offered the opportunity to apply for a margin account. While it is typically never a good idea to use your entire available margin, leverage can give you the flexibility to take advantage of investment opportunities that might not be possible in a cash account.