What is Margin Trading?
When a trader trades using margin they are basically borrowing money to trade. Trading on margin can be very dangerous if you don’t have a good trading plan.
How Margin Trading Works
Margin trading allows a trader to trade more money than you have in your account.
Account value: $10,000
Available to trade: $20,000
So on this 10,000 account this trader could trade 20,000 in the above scenario.
Let’s say you buy 200 shares of aapl at $100. The values of that purchase would be $20,000.
You have enough in your account to cover $10,000. Let’s say that aapl goes from $100 to $50. How much is left in your account? Answer: $0
If the value goes to $150 then the new account value would be $20000.
So margin can be good or it can be bad. It is important to have a good trading system.
Margin Trading Account
To be able to trade on margin you must sign up with your brokerage firm. This will make you account a margin account. In a margin trading account the amount held in margin accumulates interest.
The margin call is a dreaded thing for a trader or investor. Once you place a trade your account has a maintenance margin. If the money in your account falls below the maintenance margin the brokerage will issue a margin call. In that case the trader or investor has to deposit more money or sell some of the position. If you do not meet the margin call by a certain date the brokerage can sell your position for you.
Margin trading is a good tool for every trader with a good trading system. It is not a good tool when trading without a system. Every good system must use the stop loss to minimize risk. Follow the system and live to trade another day.