Is It Ever a Good Idea to Invest on Margin? The Motley Fool


is margin trading a good idea

The longer you hold an investment, the greater the return that is needed to break even. If you hold an investment on margin for a long period of time, the odds that you will make a profit are stacked against you. A margin call is effectively a demand from your brokerage for you to add money to your account or close out positions to bring your account back to the required level.

Margin trading in crypto is the process of borrowing funds from exchanges and using those to buy more crypto or to trade. The advantage of buying on margin is it allows you to boost your purchasing power and magnify your wins. That’s why margin trading is also referred to as trading with leverage. In crypto, futures and perpetual contracts represent some ways to gain leveraged exposure. However, some exchanges like Phemex also offer margin trading on the spot market.

Margin Trading With Phemex

There’s no way to know for sure if a trade will go in your favor. It is possible for a trade to go against you right from the beginning. When this happens, your losses will be magnified because you are trading on margin, just the same way your profit increases when a trade is moving in your favor. With a 50% margin, your losses would be twice what it would have been with a cash account.

is margin trading a good idea

Provided your equity doesn’t fall below the maintenance margin, you can hold the loan for as long as your trade lasts, and repay when you close your trade. So, in other words, the initial margin is the amount you need to open the position, while the maintenance margin applies after you’ve entered the trade. It often happens that your next contribution to your investment account is a few days or perhaps a week away, and it can easily cover the amount you are going to invest in this opportunity. Assuming this is not a hot tip stock and you have satisfied yourself with the merit of the investment, go ahead and use the margin to start your position.

Margin Trading Tips

When you fall below the maintenance requirement, the broker sells your shares to get their money back. They can do this without your consent, which means you have no shares, and you still owe them money for the part of the loan that’s left unpaid after they sold your shares. We touched on this above when explaining why investors buy on margin, but let’s take a deeper dive into the advantages of margin trading. ” But you quickly became intimidated by the many moving parts involved. But the bottom line with margin trading is that you will go into debt in order to invest.

is margin trading a good idea

An initial investment of at least $2,000 is required for a margin account to buy stocks, though some brokerages require more. Once the account is opened, approved and operational, you are permitted to borrow is margin trading a good idea up to 50% of the purchase price of a stock. Sometimes brokerage companies will offer you to borrow a little bit more than this percentage. However, 50% is the customary amount for margin account borrowing.

Increased purchasing power

When you have a margin loan outstanding, your broker may issue something known as a margin call, particularly if the market moves against you. When you get a margin call, your broker can demand you pony up more cash or sell out positions you currently own in order to satisfy the call. If you can’t cover the call, your broker will liquidate your positions to get it covered.

  • As a result, the 10% requirement led to rampant speculation, increasing leverage dramatically, and when the market crashed, many investors that used margin were wiped out.
  • Short selling and margin trading entail greater risk, including, but not limited to, risk of unlimited losses and incurrence of margin interest debt, and are not suitable for all investors.
  • ” But you quickly became intimidated by the many moving parts involved.
  • A cash account allows you to only use deposited cash to buy and sell stocks, or to purchase basic stock options.


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