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If you’re a trader, you know that trading on margin fuels some incredible money-making opportunities. On the other hand, if you’re a beginning trader, the prospect of trading on margin could scare the pants off of you, or your reaction could be completely the opposite. It could cultivate a burgeoning excitement or curiosity.
While everyone’s initial response and ensuing experience are different, there are some commonalities that everyone who trades on margin experiences.
What is Margin Trading?
When you buy on margin, you borrow from a broker to purchase stock using a special margin account with that particular broker. Buying on margin allows you to purchase more stock than what you’d otherwise be able to buy with just the funds in your account. Ultimately, doing so ramps up your buying power.
If you’ve read a little bit about margin trading, you might see another word bandied about, and that word is “leverage”. Note that margin is not leverage. In fact, margin allows you to leverage the funds in your account to enter larger trades. Leverage is expressed as a ratio. A 3:1 leverage, for example, means that you would be able to hold a position that is three times the value of the amount in your trading account.
How Does Margin Work?
Individual brokerage firms will offer you a list of accounts that are marginable. Most brokers require at least $2,000 in equity in order to access margin through that particular broker.
How does margin work, anyway? Fidelity’s website offers a great example of how margin specifically works:
Obviously, stock prices could drop when you’re trading on margin, too, and here’s a great illustration of how that can impact your account on TD Ameritrade’s website:
Pros and Cons of Margin Trading
As with any type of trading you’ll do, there are pros and cons, but margin trading could offer a heightened nail-biting scenario if not done correctly.
Pros, or benefits, include:
- The most positive benefit to trading on margin is the maximized potential returns because of leverage.
- More trades are available and offer more diversification because of the amount of buying power you have while trading on margin.
- You can employ more advanced strategies.
- You have more trading flexibility.
- Interest on margin loans could be tax deductible against your net investment income.
Cons, or risks, include:
- It’s inherently risky to trade on margin, and you could lose your initial investment, plus what you borrowed.
- Trading on margin involves additional costs through the broker in the form of interest on your loan.
How to Manage Risk
Trading on margin isn’t for everyone. It’s important to carefully evaluate your risk tolerance and ability to trade on margin based on your financial resources.
The prospect of losing money through leverage is a major risk, as previously discussed. Maintenance call risk is another type of risk, and what happens when your account’s securities fall below the minimum maintenance requirement. Margin calls are required to be paid immediately, so it’s imperative that you leave a cash cushion in your account to reduce the risk of a margin call.
In addition, the more research you can do to try to minimize risk on your account, the better off you’ll be. Thoroughly research the securities you’re considering.
Where to Start Margin Trading
Most major brokerages offer some form of margin trading – even some of Benzinga’s picks for the Best Online Brokerages. Here’s a quick peek at some of our favorites.
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- Advanced traders
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Intuitive trading platform with technical and fundamental analysis tools
- Does not support trading in mutual funds, bonds or OTC stocks
Moomoo is a commission-free mobile trading app available on Apple, Google and Windows devices. A subsidiary of Futu Holdings Ltd., it’s backed by venture capital affiliates of Matrix, Sequoia, and Tencent (NASDAQ: FUTU). Securities offered by Futu Inc., regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Moomoo is another great alternative for Robinhood. This is an outstanding trading platform if you want to dive deep into smart trading. It offers impressive trading tools and opportunities for both new and advanced traders, including advanced charting, pre and post-market trading, international trading, research and analysis tools, and most popular of all, free Level 2 quotes.
Get started right away by downloading Moomoo to your phone, tablet or another mobile device.
- Cost-conscious traders
- Active and Advanced traders
- Over 8,000 different stocks that can be sold short
- Access trading and quotes in pre-market (4 a.m. to 9:30 a.m. ET) and post-market hours (4 p.m. to 8 p.m. ET)
- No minimum deposit to open an account.
- No chat support
It seems like new digital investment management platforms are sprouting up left and right, and for good reason — there’s a great need for easy, straightforward investment management that doesn’t cost an arm and a leg in fees or to get started. If you’re new to investing or an old hat who wants to make the switch to a virtual manager, deciding which features you need can be confusing if not overwhelming.
If you want a no-frills financial management platform, Axos Invest (formerly WiseBanyan) takes a traditional but sophisticated approach to automated online investing.
- Traditional investors trying out an automated investor for the first time
- New investors that want to take a hands-off approach to portfolio management
- Straightforward automated investing
- Relatively low account minimum and automated investing fee
- A solid roster of available investment account types
- Not a stand-out from other services if you’re someone who likes all the bells and whistles with your digital financial platform
- No direct relationship with a human financial advisor
This latest groundbreaking technology is IBKR GlobalAnalyst, a new trading tool that helps investors compare the rate of PEG or price-earnings growth valuations and provide more immediate and comprehensive financial metrics of stocks, globally.
Recognizing that stock selection can be challenging for investors to compare the valuations of domestic and international stocks, Interactive Brokers created GlobalAnalyst to offer investors a simple, yet powerful tool to easily evaluate investment opportunities around the world.
Using GlobalAnalyst, investors can search for stocks by region, country, industry, market capitalization and currency to uncover undervalued stocks worldwide. The resulting table displays the current market and financial metrics, including the PEG Ratio. The PEG Ratio is the PE ratio divided by the three-year compound earnings growth rate, and smaller PEG Ratios typically indicate undervalued companies.
- Price earnings growth valuations
- Easily evaluate investment opportunities
eToro is a broker that offers access to over 25 of the world’s most popular cryptocurrencies, forex and over 1600 stocks. They have a few unique education and useability tools. Traders can begin buying and selling in as little as 10 minutes.
eToro’s unique CopyTrader feature allows new investors to “copy” the buy and sell orders of professional investors, while the company’s eToro Club feature provides investors with a range of additional education tools and resources.
- Traders looking for an easy-to-use platform
- Traders who want to practice their trades using a virtual account before entering the market
- Simple platform that is easy to master
- CopyTrader feature that allows new traders to copy the same strategies used by professionals
- Virtual dummy account that gives you $100,000 to practice trades
- High non-trading fees
Final Thoughts on Margin Trading
All brokerages have different margin rates, so learn all about interest rates for margin accounts at all the brokerages you’re considering or wherever you already have an account. You’ll also want to pay close attention to account minimums as not to incur any fees or barriers to trading. If you’ve done the research and can afford to take a risk, then margin trading may be right for you.