Every year, investors come across new ways in which they can invest and grow their accounts in different ways. Margin trading is one such way where people are currently experiencing great gains and returns, while also being able to grow their account rapidly.
This isn’t to say that there are no risks involved in the process – but you could figure out if this mode of investment will work for you once you know all the facts about margin trading. In this article – we’re going to walk you through some of the basics of margin trading, and also explain how it can help you rapidly grow your account once you get the hang of it. Let’s get started.
How does margin trading work?
In short, margin trading is when you take out a loan from your brokerage to buy stocks, and later pay out the loan with the interest you get from the stocks. This is the general principle behind margin trading. Like any aggressive investment, it comes with its own risks.
For instance, if your stock fails, then you will have a difficult time paying back the loan since you won’t be getting the interest you initially expected to get when you bought the stock. However, there are certain ways in which you can minimize the risks, especially by studying the stock market and making informed decisions, while also making sure that you don’t bite off more than you can chew (in terms of your loan).
What are the benefits of margin trading?
Margin trading is an easy way to invest and make great returns. But there are also some other benefits that may influence the way you feel about margin trading – here are some of them:
1. You get tax deductibility
This is something that you’ll need to discuss with your tax advisor prior to taking out a margin loan, but margin trading does give you tax benefits. This is a huge plus for people who use their investments to get tax deductibility.
2. Great interest rates
Another main benefit of margin trading is that the interest rates are great – which is the primary reason why people overlook the risks involved in this form of investing.
3. Use your current investments to make more investments
You get to borrow loans using your current investments as your assets. There are certain specifications that you’ll need to have to fit the criteria of someone who can borrow on margin – but once you hit this, you’ll be able to effectively use margin trading and lending to grow your trading account.
For instance, margin lending on SoFi allows you to borrow money and invest it, which will then be added to your portfolio which you can then pay back (with interest) at a later date, using the interest you would’ve gained via the investments you made.
4. Less paperwork, less hassle
Loans usually involve a tonne of paperwork and a lot of waiting around before you can actually receive the loan you applied for. However, margin trading is a lot faster and easier. For instance, you can get a margin loan with little to no paperwork and also use it to finance other personal needs that you may have, apart from paying off the interest of your loan.
5. More flexibility for investing
Being able to invest more in growth opportunities while having limited cash in hand may seem like a risky move, but it also gives you the flexibility you need to double your investments even if you don’t have immediate funding.
What are the risks involved in margin trading?
When there’s a chance for reward, there’s also always a potential risk factor involved. Here are some of the main reasons why you need to be aware of what you’re getting into when you start margin trading:
If the stock you’re investing in using the margin loan goes into a loss then you won’t be able to pay back the loan with the interest you initially thought you would receive from the investment. This may lead to trouble, especially if you were dependent on the interest to pay off the loan. You may even have to see the investment to pay it off. Your credit may get affected if you aren’t able to pay off the interest on time. In order to get a margin loan, you’ll need to maintain a specific amount in terms of assets in your account. If this falls below the minimum maintenance value, then you will have to deposit an additional sum in cash or collateral to maintain the minimum asset value. If you don’t meet the minimum requirement, then your brokerage can also sell some or even all of your securities.
Based on the advantages, disadvantages, risks, and potential rewards involved in margin trading, you’ll now be able to make an informed decision on whether or not this investment works for you.