Trading on Margin

The Apprentice finale ended recently, and I was reminded that Donald Trump’s wealth was amassed through the use of leverage in real estate. Borrowing money to make money isn’t just done in real estate, however. Day traders have additional buying power on hand every day in the form of margin, and using it properly can mean significant gains.

Possibly more impressive than Trump's ability to leverage is his ability to balance a dead animal on his head.

Margin is the ability to borrow against cash and/or securities in your trading account in order to purchase more. Day trading margin accounts allow for 4-to-1 leverage intraday, and 2-to-1 leverage overnight against the cash held in the account. This gives the active trader access to the double-edged sword of leverage, generating profits and losses at a much faster pace. Although swing trading stocks and holding overnight on borrowed funds costs interest, day trading on margin doesn’t cost a thing.

Margin trading isn’t for the faint-of-heart. Knowing that you can lose money up to 4 times as fast as a cash account can be scary to a trader, but it’s important to note that it shouldn’t be used at all times. While a designated day trading account inherently comes with the increased leverage, the trader is the one making a decision on just how much of that buying power is to be used.

Consider these 3 ideas when it comes to margin trading:

Margin is for experienced traders only. Beginning traders can be more susceptible to emotional swings that come with trading. The urge to “make it back” after a loss can easily be compounded into a major error when trading on margin. Consider trading on a cash account for a while until you feel comfortable with the added leverage that a margin account can provide you.

Margin doesn’t have to be used every day. On a day trading basis, I use margin more frequently than I do when I’m holding overnight positions. Market conditions and the stocks you’re trading will determine whether you need or should be using margin regularly. If you’re day trading several thousand shares of QQQQ and SPY simultaneously, you may need the additional buying power that a margin account can offer you. A liquid issue like QQQQ or SPY which are index-based will move far less than a headline-driven stock like RIMM, making them prime candidates for trading on margin.

Margin demands your respect. Any veteran trader would agree that only on occasions will market conditions be ripe for going “all in.” Putting the pedal to the metal with regularity will at times no doubt leave you leveraged in choppy markets, digging a hole which will take you some time to get out of. Don’t let the scary stories of margin trading spook you away from using it as an instrument to your trading, just be sure you respect what it can do – both for you and to you!

Trading on margin can offer tremendous benefits to the trader who knows what he’s doing. If the market has momentum and you’re in sync with it, you can make much more money when you’re right and boost your returns significantly.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com