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Investment Dictionary

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Margin Trading


Margin trading is trading in securities when part of the investment portfolio is financed by borrowed money (the other part by your own capital). For example, you have investment portfolio of value $20k, end you believe that stock market will rally, so you want to buy more stocks, but are lacking of funds. So what you do is you use your own stocks (as well as new stocks that you will acquire) as collateral and you are getting a loan. For that money you buy new stocks (the same or any you want). 


The margin limit (the maximum proportion of borrowed and own capital) depends on a margin trading provider (which usually is some brokerage company) and on stocks (or other securities) that are used as collateral. Usually different securities have different collateral weighting, but if stocks are liquid and from good stock exchange lists, most margin trading providers should offer you margin limit, which will allow you to split capital in 50% of your own funds and 50% of borrowed money.


There is one good thing about margin trading: if prices of stocks that you picked are growing, your equity may grow twice fast as that.


There are few bad things about margin trading: if prices of stocks that you picked are falling down, your equity may decrease twice fast as that. You are paying interests for the money that you have borrowed. And you may lose all you money and even more very fast (faster than you can imagine) in a serious stock market crash.


Margin trading in its meaning is very similar to repo (repurchase agreement). The main difference between repo and margin trading is technical: repo is made for each security separately, and if that security looses its value (even if other stocks do great) you will have to put additional funds or sell that security. While margin trading is usually computerized and it is used for investment portfolio as a whole, and margin trading is more modern and more user friendly for investors than repo


If you are not sure whether to use margin trading, you should read the investment book Investing for Beginners Exposed. 


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