Advantages in Margin Trading



Usage of margin matters because of the leverage. Just like what companies usually do, they borrow money in order to invest in projects. The same goes true with investors, which can borrow money and leverage to invest. Once a stock goes up, every point is amplified by leverage. You can earn bigger profits as long as you choose the right investment.

You have at least two buying possibilities with a 50% initial margin and can buy as much stock as you intend to, using your cash in your account. The use of margin account is easier to earn profit than the trading which comes only from cash position. What’s important is whether or not the stock is increasing. The world of investing will always debate whether it’s promising to continuously choose winning stocks. On the other hand, the margin offer opportunity to increase your returns.

Here’s an example of how important is leverage is:

For example, the securities bought is worth a $20,000, margin of $10,000 and cash of $10,000. Apple Inc. is trading at $100 and you have fundamental analysis that it will radically rise. Most common cases is you’d only try 100 shares (100 x $100 = $10,000). As you are trading on margin, you could avail 200 shares (200 x $100 = $20,000).

Apple Inc. then locks in a spokesman and the share prices rose 25%. Now, your investment is $25,000 (200 shares x $125) and you choose to cash out. After the broker is paid, the $10,000 borrowed, you get $15,000, it gains profit of $5,000. A return on investment is already a 50% considering the stock increase only by 25%. Remember, we don’t take into account commissions and interest. Else, your profit will be deducted from these costs.

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