Margin trading gives traders the opportunity to make more money in less time, however it is not advised for beginners. Once you are familiar with the stock market and how it works, only then should you begin to look at margin trading.

In normal trading you trade using things you own. The difference with margin trading is that you are borrowing what you trade with from your broker. This increases the potential for things to go wrong. It is very simple to borrow more than you can afford to pay back, due to the fact you do not have to pay for it initially. It is important to be aware that if anything goes wrong you can end up owing a lot of money in a small period of time. This is the very reason why novie traders should not start margin trading. With other forms of stock trading you can only lose what you have. For example, you have $1,000 in shares and if everything goes wrong you only lose that $1,000. If you are involved in margin trading however, you can end up losing a lot more.

Guidelines When Starting Margin Trading:

  • Find out as much as you can about how it works and understand the potential for losses.
  • Learn and understand leverage. Leverage put simply is borrowing from your broker without holding the shares yourself. An example of when you would want to use leverage is if you were holding $1,000 in shares and you think you are going to be making a good profit on them, you know you could make more profit if you had more shares. By borrowing from your broker you can access this increased profit.
  • Understand if the market is good you can indeed make more money by margin trading, however if the market does not go your way it will lead to your losses mounting up quickly. This is how you can end up owing a lot of money.
  • It is important to know exactly what you are doing and not to be tempted by ifs and maybes when you are margin trading.

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