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Stock market buying stocks on margin can be risky

By Edited Oct 2, 2016 0 1

If you trade the stock market buying on margin can be risky. Making money on risky investment is a decision you have to make.You need to practice restraint when buying stock on margin. Most stock brokers will have a margin account. You will need to apply to the broker and get approved to trade on margin.You need to figure out you risk level and never raise it. Buying on margin means the stock broker is loaning you the money to place the trade.Try and stick to 20 to 30 percent of your account. You can also use your margin account to trade stock options. Interests rates on a margin account will very from broker to broker.

The basic idea of a margin account is you don't have to put up all the money to buy a stock or stock option. Usually a broker will allow you to borrow up to 75 percent of your account some brokers allow 100 percent. For example if you have $10,000 in your account and its margined 100 percent you would have $20,000 to trade on margin. This is where the risk comes in especially if you get a margin call. If you do some figuring you can see how investing on margin can increase your profits. At the same time it can increase your risks if the stock price goes down.Remember you have to pay interest on your margin loan once you make a stock trade on margin.

Make sure you are aware of the risks before you buy on margin. If you get a margin call the broker can sell all your investments to cover the margin. You are responsible to pay the amount you owe to the broker in cash or most brokers will take credit cards to pay off a margin call. Again never borrow more then 20 to 30 percent the value of your account. If you don't go above that amount it is unlikely you will get a margin call in a bear market. The same is true if you are short selling a stock.

If you are going short on a stock the broker is loaning you the shares on margin. You are hoping the shares are going down in price. You then cover your short and the brokers takes the shares at the lower price. The profit you make is the difference between when you shorted the stock and covered the trade. Basically what takes place is that the broker if they have the shares sells them to you at a higher price and you sell them back at the lower price thus creating a short sale. If you short the stock on margin and it goes up then the trade becomes risky and you could get a margin call from the broker.

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Comments

Sep 12, 2010 4:23am
scheng1
it is still not as bad as forex trading. Forex trading allows 20x to 40x margin.
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