Last Updated: 9th December 2022 - 12:44 am
Margin trading is when you borrow money from your stockbroker to buy stocks of a company, and in return, you pay an annual interest to the stockbroker on the sum borrowed. In recent times, margins trading has become a great form of investing through leverage and allows an investor tobuy stockswithout having to pay a vast sum of his/her own money.
If you are planning to enter Margin Trading, given below are nine easy tips to help you succeed:
1. Learn about the interest rates: Just like a bank loan, there is a specific interest rate on the money borrowed by you from your stockbroker. You have to pay an annual interest on your borrowing to your stockbroker. Typically, a stockbroker charges around 8% interest rate, but it is always changing depending on your portfolio size. You have to know what interest rate you have to pay before you start margin trading. It will allow you to better control your costs while trading.
2. Buy gradually, not at once: The best way to avoid loss in margin trading is to buy your positions slowly over time and not in one shot. Try buying 30-50% of the positions at first shot and when it rises by 1-3%, add that money to your account and but the next slot of positions. If on the first go, your stocks fall by a certain percent, you won't have to incur huge losses which you would have, if you have bought every position at the first go. This will keep your risk minimized until you make profits through your stocks.
3. Understand the terms: Before entering the trade of margins, you should clearly understand its terms and conditions and other regulations you have to follow while trading. Finding out something negative later into the trade can influence the whole performance of your portfolio, and you can lose money in the market. Always make sure that you read all the instructions provided by your stockbroker carefully before making a trade.
4. Avoid margin calls: Margin calls are never a good thing to have in your account. A margin call is a warning given by your stockbroker to you to add more money to your account to cover the losses or sell your stocks to compensate for the same. Every stock you buy under margins trading has a price level at which a margin call is triggered. Be sure to understand everything about the margin call before purchasing a stock.
5. Use stop loss orders: The best thing you can do to avoid losses and a margin call in your account is to use stop loss order with every stock you buy. It will allow the stockbroker to automatically sell your shares once it falls below a specific price level. A stop loss order is a perfect tool that can enable you to cut your losses and you won't have to lose all of your money while margins trading.
6. Be careful of upcoming news: With dealing with upcoming news regarding your positions, like earning reports, an investor must be really careful. People tend to buy more stocks of a company before 2-3 days of the declaration of earnings reports, basing their decisions on the upcoming positive news about the company. While it is a good tactic to earn more profits, an investor must be extra cautious in the event of the news not going their way after the report has been announced.
7. Have a backup cash fund: The worst thing a margins trader can do is to risk every penny he/she has got in the account and then lose it all because of the crashing of the market. It can make you go in massive debts which you won't be able to recover for a long time. Keeping an emergency cash fund can allow you to conquer this worst-case scenario and let you recover from a margin call or buy a new stock to hedge the risk.
8. Never speculate: Keep as far away from speculating as you can. Speculation with your money is never a smart thing to do as you stand to lose more than you stand to gain. Instead, go with a traditional Profit vs. Loss ratio as it will enable you to gain even when you are wrong in your decisions several times in a row. While margins trading, the most important thing to make profits is to adopt a habit of disciplined investing.
9. Stick to your strategy: You know yourself better than anyone else. Something that can be right for someone can prove to be the worst decision of your life. Adopt a simple strategy, make some smart rules and do whatever you can in your power to stick to them no matter what. Avoid the herd mentality and choose what is right for you. The best person to give you financial advise is you and you alone.
