Margin trading is a most popular word among traders. Trader’s attraction towards Margin trading is the thinking of making a fast buck. With margin trading a trader can buy/sell in much larger quantities than would be possible generally with cash/stock in hand. But using too much of margin in trading is good? In this blog we are going to discuss about the risk and benefit of using too much exposure in trading.

Trading with margin means trade with borrowed money. Usually brokerage firms determine the amount of margin you are allocated in your trading Account by considering your cash on hand as equity. It would be different for different markets (i.e. commodity, equity, forex). Consider a standard margin account. For a standard margin account a brokerage firm always offers twice the value of cash on your hand.

That is if you have $50k cash on your hand then the brokerage firm will allow you to use up to $100k to trade. A minimum of $25,000 cash would be needed in your hand for day trading. And your brokerage firm will extend you four times your cash. So for day trading, if you have $100k cash, your brokerage firm will allow you to use up to $400k.

When you sign up for a margin brokerage account, generally:

• Stocks, bonds and all securities in your account held as security for a margin loan
• The margin maintenance requirement is different for different broker and also they have the right to change this at any time. In that case, you might be forced to pay off your margin debt balance without warning.
• While using margin, possibility of losing money is than you investing exists. The brokerage firm is not responsible for the loss made by you and you will be legally responsible for paying any outstanding debt you may have to your broker.
• The brokerage firm has the right to change the interest rate at any time.

First ask yourself how much margin do you want to use? If you are coming from a place of effective money management you do not use the full amount extended to you by your brokerage firm. If you do the reverse it is clear that you are coming from a place of greed.

The NYSE report record levels of margin dept, in June it reached close to $505 billion, it was dropped down to $487 billion in July and $473 billion in August 2017. So that many of the traders remaining cautious even though margin trading gained popularity in recent years.

However, if margin trading used responsibly, it has several benefits and conveniences

The benefits of Margin Trading

• To sanction a loan generally a lot of paperwork and hassle of credit checks is required. Apart from this if you have a margin account with you, you can borrow against your assets for non-trading purposes. This is a lesser-known advantage of margin account.
• Margin accounts also have cheaper interest rate than other lending options. This low- Cost interest rate is also another added advantage of margin account. There is no minimum monthly payment requirement and easy access to the debt.
• Margin accounts have added purchasing power. Investors can purchase more asset than the value of the available cash in their hand. Margin account can be used for both long trade and short trade. If your trading portfolio is well executed your trading can result in high returns with increased market exposure.
• If you’re short on cash temporarily and a trading opportunity arises, trading on margin can help you avoid selling your existing securities prematurely just to raise cash. Margin accounts can also provide the opportunity to diversify a concentrated portfolio. Several traders said that margin trading is risky, but if it is used wisely and responsibly it has several benefits.

 Limitations of margin trading

• Margin accounts simply help you to place trades with a loan amount. Typically this account is keep up separately from usual cash accounts. So read carefully and completely the terms and conditions before taking out a loan account from your broker.
• Margin loan have some certain rules and regulations. Presently, an investor can borrow 50 percent of a purchase as per federal regulations. That means, if you want to buy a stock of $10,000, your margin loan can sponsor $5000 for you.
• The minimum margin deposit for a brokerage firm is $2,000. Brokers also need to maintain minimum balances in margin account through margin calls. This is called maintenance margin restrictions of broker. If the value of a security fall below this level, it is essential for an investor to overcome this by either selling shares or by depositing additional cash.

How to Manage Margin Risk?

• Invest what you can afford to lose. One major risk you have to face in margin trading is amplified losses. Suppose you borrow $1,000 from your broker for buying a stock of $2000. Beyond your expectation if that stock goes down 50 % and there’s a margin call, then 100% of your investment will get lost. So don’t invest what you can’t afford to lose. And try to set correct stop loss orders to protect your initial capital from huge losses while you trading using leverage.
• Test your skills slowly and start trade with small amount if you are using margin. Learn to borrow less than the maximum limits.
• Be careful about extra sensitivity. Take extra care for your margin account because margin accounts are more sensitive to day-to-day market movement than cash accounts.
• Research your stocks carefully: if you don’t analyze a stock thoroughly and you are not confident enough to buy that stock, don’t use margin. In a hope of rebound you can hold a declining stock in a cash account if you are already owned that. But there is a risk of forced sell if the stock’s price drops too much.
• Held margin investment for short-term: you should pay monthly interest fees for a car loan or mortgage. Like this, margin account holders also need to pay monthly interest fees for their borrowed money. So if you held margin investment for long-term then your expense becomes large. So follow short-term trading to minimize costs.
• Prepare a solid plan before taking margin trade: Block margin calls from catching you surprisingly and force you to clear up rashly. So prepare a plan before taking margin calls and stick with it.
• Keep monitoring your account: carefully monitor your account and take immediate actions on those stocks you owned.

Use margin accounts responsibly, it can provide multiple benefits to investors. Before trade on margin evaluate your risk tolerance and investment strategies.

Below mentioned some blogs might be useful to better understand about technical analysis system and use of technical analysis software to pick accurate buy sell signals:

1. Stop Loss, the key factor in successful day trading in Commodity, Currency, Stock Market
2. Become a disciplined trader in FOREX, MCX, NSE, COMEX markets with best buy sell signal software
3. Defining the Principles of Successful Day Trading in FOREX, MCX, NSE, COMEX Markets With Best Technical Analysis Software
4. Philosophy of Technical Analysis with best buy sell signal software
5. Customized PIVOT POINT with Trade Smooth Technical Analysis software in FOREX, MCX, NSE
6. EDUCATION IS THE KEY TO SUCCESS IN TRADING FINANCIAL MARKETS

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