Just like every loan, there is an interest rate for what is borrowed. In the case of the stock trading, any online stock broker typically will charge somewhere around 8% a year interest on borrowed funds (rate varies depending on total portfolio value). By understanding the interest rates there is a stronger chance for investment success.
Depending on the portfolio size more often than not investors should buy into a position over time and not with one large order. Try taking half the position at first, find some headway (1 – 3%) to the upside and then add to it from there. This will keep your risk to a minimized level until you have a stronger chance of an overall profitable trade.
Before trading on margin make sure to understand the rules of the game. A regular trader will be able to attain 100% margin on his or her account, but there are ways to extend this. If declared a pattern day trader by the SEC investors may be able to borrow more than 100% of their account. Always make sure to read the broker guidelines carefully before making the first trade on margin.
Investors never want to have a margin call on their account. A margin call requires the investor to either deposit more funds into their account to offset the losses on margin or sell a position completely. Every position initiated will have a specific price level where if reached a margin call will take place, so be sure to understand this price area before purchasing.
The worst scenario for any investor is to risk it all, then lose it all, and then proceed to go into heavy debt because of it. By keeping cash on the sidelines to serve as backup funding some of these “worst of” situations can be prevented. Portfolio cash can be used to recover from a margin call or purchase another position to hedge the risk.
Just like Warren Buffet focuses solely on fundamentals to make sound decisions when investing, every investor should stick to their own set strategy. New investor should read several investment books before pursuing any trading on margin. 4Share Tweet 0Share
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