Buying On Margin To Increase Your Profits

Buying on margin can be a very powerful way to leverage your money in the stock market. Here is a question. Say you wanted to make $100 in the stock market. Would it be easier to make $100 from $500 or $1000? $1000 of course. nn If you make $100 from $500 that would be a 20% increase. That can be a little hard to pull off in just a month. But if you make $100 from $1000 that is only a 10% increase in a month. Now I’m sure you all realize that the more money you have to invest in the market the more you can pull out. Here is an example on how margin lets you do just that.nnn Tom wants to buy stock ABC. It is a strong stock that he believes is going up. The stock is currently trading at $85. He buys 100 shares of ABC for $8500. 2 years go by and ABC is now trading at $170. Tom is excited and sells his stock for $17000. This gives him a 100% increase in just 2 years. nn In this example Tom made a good profit from his investment. But there is a way in which Tom could have made even more. Want to know how?nn What if Tom not only bought 100 shares of ABC, for $8500, but also borrowed an additional $8500 to buy another 100 shares. Now he owns 200 shares. Well when the stock went up to $170 and his 200 shares would have been worth $34,000. After the $8500 he borrowed back Tom would have had $25,500. This would have given Tom a 200% return on his money just by borrowing money more money. nn How can Tom do this? Well Tom’s broker has some extra money. The broker doesn’t mind loaning Tom some to make a few trades. In fact Tom’s broker will loan him up to 100% of his account value.nn Now there are some bad things that can happen when you borrow money. Because when you buy on margin it is a loan you will have to pay some sort of interest on the $8500. Tom borrowed $8500 and might have paid back $9000. Tom paid back so much because he held the stock for a long time. If he had only held the stock for a few months he might have only paid back $8600. Every broker has a different interest rate. To find out what your broker charges you can simply call them up and ask them.nn Worst than the fee’s you pay for buying on margin are margin calls. If Tom’s stock had gone from $85 to $50 his broker would have started to worry and for a good reason. If Tom doesn’t have any money than he can’t possibly afford to pay back the loan. At this point your broker may call you up and tell you to sell your stock within a couple might pay for days. Tom would have had to sell his stock for $40, took a loss, and most of what was left would have gone over to the broker, Owe. nn There are a few things you can do to prevent margin calls from happening to you. nn1 You can set a stop. You shouldn’t let your stock go from $85 to $50. If you set a stop for maybe $80 you would have lost only $5. It is better to get out of it for a small loss than to accumulate a bigger one, this is especially true if you bought the stock with margin. nn2 Put more money into your account. If your stock starts to fall and you still like the long term picture. You can always put more money into your account to pay your broker if he starts to get nervous.nn3 Don’t buy on margin. If you want to invest in the long term and don’t want to take the chance that you might get a margin call, don’t borrow money. You can still make money without it.nn Buying on margin can be a powerful way to leverage your money in the stock market. I still borrow money every time I make a stock trade. It can help make small profits turn into bigger profits. If you don’t know if this technique is right for you maybe paper trade with it for a while. Get used to it. You never know if it works well for you until you try.nnFor more information on how to trade the stock market visit http://www.stocks-simplified.com n