Margin Trading Risks

Margin accounts don’t appeal to all investors as it is said to be risky, and with the use of leverage, it helps strengthen the losses and gains to the same degree. If an asset swings its price, risk is defined, as leverage is the one that supports these swing. By definition, your portfolio increases its risk.

Say for example, you buy  200 shares, now your investment is $15,000 worth (200 shares x $75). You positioned to sell on the stock, paid your broker back the $10,000, and left with $5,000. That’s already a 50% loss, plus commissions and interest, which supposed to only have a loss of 25%.

50% loss is bad, more than that is worse. Investing on margin is specifically a stock-based investment set to lose more money than your investment. A decline of 50% or more than that will put you in uncertainty. It will lead to a loss of more than 100%, with interest and commissions on top of that.    

In a cash account, there’s a big possibility that the stock will make a rebound. If the company’s fundamentals don’t change, you may hold on for the recovery. If somehow it’s a consolation, your money will be lost until you sell. However, if the price of the stock was down, in a margin account, your broker can sell off your securities. It implies that all losses are locked in and participating in any future rebounds that may take place is not permissible.

For inexperienced traders, it’s inappropriate to try margin, even if you feel like you’re all set. Just keep in mind that borrowing 50% is not necessary. Invest only in margin along with your risk capital, or enough money for you to lose.

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