Investment Advice – Margin Accounts

Depending on the type of personal risks you wish to take with your investments will dictate if you should obtain Margin-Enabled accounts or Margin-Disabled accounts. With Margin trading, you are using borrowed funds in order to increase your buying power. Many investment brokerages will lend you money using the securities in your account as collateral. With this increased leverage from borrowed margins, you are increasing both your potential gains and losses overall.

With a non-margin account you will invest money that you can spare and purchase shares. In a short amount of time, those shares will increase (or in some instances, decrease) and you will see a change in your overall investment capital. If you have made a solid investment decision, your shares will have increased in value anywhere from 10-35% from the original purchase price, therefore making you additional capital gain.

In a margin account you could borrow a dollar (or pound) for each dollar that you have in your account, which is usually a total of 50% of your portfolio’s overall value. Now by doubling your buying power, you can invest more and create a strong gain if your total stock increases. But with this option, you will gain only 50% of these profits minus the interest payable on the borrowed funds. This is a very finicky way to invest and it has to be monitored closely in order to avoid financial disaster if you are using borrowed money to invest for larger gains. Doubling your gains seems attractive, but doubling your losses can be fatal for any portfolio.

The negative aspects of margin trading are very clear and concise. Your investment broker will lend you money based on the current value of your stock that you already own to date, but when that stocks starts to drop, consequently so does the amount of money that you can borrow for margin trading. If this is your situation, your broker will require some of that money back or that you put more funds into your margin account. Sometimes it is impossible to meet that requirement and your investment broker will be forced to sell some of the stocks that you own at the present in order to cover those costs of your position, this being referred to as a margin call. Selling stocks at a loss is not a positive result any way you look at it, and can be even more disheartening if those stocks rise a short time later after being sold.

There are basic principles that people who are keen on margin investing should follow in order to minimize the risks they take for profit. Even if you are determined to buy with margin accounts, invest with money that you can afford to loose and borrow only half of what your investment broker is willing to lend you, therefore minimizing your risk potential. Once you have investing marginally, keep a very close eye on your stocks because you will want to bail out at the first sign of decline before it puts you in a position that will annihilate your portfolio entirely.