What is Trading on Margin / A Margin Account?

Financial Education Series

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I will speckling in past Financial Education Series posts with new posts so I apologize if you have already seen a similar post on my Twitter feed, I want to make sure nobody misses my prior content. I wanted to start off with this topic because for new investors creating a new trading account one of the first questions approached with can be “Do you want a Margin or Cash Account?”

So let’s get into it!

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What is a Margin Call? What is a Margin Account?

I have noticed that a lot of people don't necessarily understand what a margin call/trading on margin is. To be clear I have a margin account but I DO NOT trade on margin, there is a reason for this.

First off, a margin account is an account in which you can invest an extra dollar for every dollar you have. This extra dollar given to you by your brokerage is effective 'debt' to be paid back (and just like taxes, debts do not ever go away).

So if you have $100 dollars in your margin account and you buy a $200 dollar stock you have $100 of your own money and $100 on margin. Let's say you buy this stock so now you are 'trading on margin' in your 'margin account' ...

If the stock goes up to $400 (100% gain) you don't walk away with $400, you walk away with $300 since you still owe them $100 you borrowed on margin  Good scenario, because if you bought (theoretically let's say) half a share with only your money you would only walk away with $200.

Now let's talk about the BAD news with margin trading.  Let's say your $200 stock loses 50% value. Your own $100 is now effectively gone (since brokerages make sure you lose your money first lol) and what's leftover is the $100 dollars borrowed - now we get into the margin call zone based on the guidelines of your brokerage. If your investment loses too much money while 'trading on margin' you can receive a margin call in which you need to put your money into the account by a certain date.  Here is what can happen also..

The brokerage, if you haven't put money into your account can (and likely will) sell all your investments no matter how in the red you are which usually will result in making a massive loss. Also, the brokerage can charge interest on you loan/margin amount that you used - it all depends on the guidelines of the brokerage.

So why do I have a margin account? I never 'trade on margin' but have a margin account because trades need about 3 days to finalize and be closed. If I have $100 in stock and have $0 in my account and I want to sell and buy $100 of different stock in the same day I need to have a margin account.

Trading in a margin account solves this, the brokerage can quickly give you the money and when your trade clears on both ends you are fine. So in reality I never trade on margin I just use the margin account to move around positions quickly.

Remember never to invest what you can't lose. Never buy something unless you can buy it twice. Winners don't trade on margin, gamblers do.  

Winners only,  

REBEL

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