Can Trading Stock On Margin Help Boost Your Portfolio?

A margin account is a useful tool for many investors, for the reason that is allows you to finance part of your investment purchase with the brokerage house. Interest on the financed amount is usually low and charged at the end when your securities have been sold. In a simple sense, you are buying stock shares with borrowed money. A margin account can be used for stocks as well as bonds, but be sure to check your brokerage firms guide lines on what securities can be traded. For the swing or day trader a margin account is very helpful since larger amounts can be used in purchasing larger stock positions and can result in higher profits. Since the amount financed is only a few day’s the swing trader doesn’t tend to feel the interest charges as much, but before you decide to start using a margin account beware of the pitfalls that can merge ahead.

A basic way you would use a margin account is when purchasing a stock. Lets say you would like to purchase 100 shares of ABC for $50 per share at a total of $5000. In a margin account you would only use $2500 of your own money to make the initial stock purchase of the requested shares. The other $2500 will come from your broker. Once you decide to sell your shares of ABC then your brokers $2500 will be deducted from the sale with your brokers finance charges on the borrowed $2500 applied.

Here are a few drawbacks when using a margin account.

1. You can loose more money than then the amount that was initially deposited into the account.

2. Your brokerage has the full right to sell your securities if they drop in value and/or believe that the portion the brokerage has financed is at risks.

3. The brokerage can contact you, and make you aware there is a margin call, in which case you will have a few days to meet the call, but they are in no way restricted to give you any notification, and can sell your securities at any time.

4. Once the brokerage has decided to sell off your securities you have no say on what securities should be sold from your account in order to meet the margin call.

5. The brokerage is also authorized to increase the requirements of your margin account at any time, and make you obligated to conform.

6. Your brokerage is never bound to agree to any type of extension towards a margin call that has been initiated.

Another way a margin account can be useful is when you need money, and currently have your securities fully paid for. Then you can call your broker and ask them to move your securities in a margin account so as you may borrow against them. This option of borrowing money should be a last resort, and never taken lightly since it is an investment that you are borrowing against. Remember only invest what you can afford to loose.