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Margin Trading

Marginal Trading allows the trader to borrow money from a broker to get the stock. Trader need not invest the whole sum of money, just like getting a loan from a bank, trader can borrow money from brokers. The first and most essential thing you need to do in order to trade on margin is creating a margin account which is quite different from cash account as it is of regular procedure were the trading is made using the money in the account. Legally, while opening a margin account the brokers should get your signature. As far as agreement are concerned it may be a completely a separate or part of your standard account opening. To start a margin account, the initial amount  needed to invest must be at least $2000. But there are some brokers who may ask for more than $2000. This deposit is known to be as Minimum Margin. Traders can borrow up to 50% of purchase price of a stock once the account is opened and commence operating the trade. Initial Margin is that the portion of the amount you deposit for purchasing the stock. The most important thing to be noted is that don't go all way up to 50%, as there is no margin for it. Traders can go for 10% or 25%. Be cautious while committing to brokers as some may ask you for more than 50% of the purchase price to deposit.

Once you fulfill your obligation then you can keep your loan as long as you desire. If you want to sell the stock you own it will be taken as repayment of loan. The brokers will take the money you borrowed, only after that it  goes for the next step i.e selling the stock. Traders must maintain the minimum account balance known to be as Maintenance Margin which is an another restriction opted for trader convenience or else the broker may force to invest money or sell stock or use it for repayment of loan. As traders borrow money it is a must to pay interest for the borrowed amount. In case of Margin Trading, the marginal securities are collateral. Unless traders decide to repay the loan the interest must be paid. As interest rate increases debt level also goes up.

Margin Trading is highly recommendable for short-term investor. But regarding other investors it is of high risk. If traders hold the investment for longer period then there is a good chance of high returns. Never forget that all stocks all stock are not qualified for Margin Trade. The Federal Reserve Bank are in charge of regulating what all the stocks can be brought on margin. According to thumb rules, broker never allow the stock listed below because of the day-to-day risk involved in it.

1 Penny Stocks

2 Over-the- counter Bulletin Board (OTCBB)

3 Initial Public Offering (IPO)

Advantages and Disadvantages of Stock Option

The company issues a certain number of shares for the employees at a fixed price for a given period with an option granted for them to purchase. This type of option is known as Stock Option. The purchase price is otherwise known as strike price which is an actual representation of stock value in the market at the time of purchasing. The employees before exercising their rights to purchase share at the strike price must wait until the option are vested which usually last for four years. During the period of vest, the market value of the stock may be increased which pay an easy way for the employees to buy shares at discount. The employee gain can be determined by the difference between the strike price and the market price on the day the option are exercised. When the employees become the owner of the stock he can possess it or can sell the shares depending on the market status.

In the past Stock Option are granted in form of compensation were top executives and outside directors alone got the chance. From 1990's onwards option was given to all employees.

Advantages of Stock Option

As stock options are granted to all employees, loyalty and commitment to the company  is growing at rapid rate. Employees become the owner of the share, so there is a good chance for the employee to take more responsibility and regarding performance they put up more effort to get the upper hand. In order to reap the future reward, the company attracts the talented employees to stay for longer period. To business man stock options provide an additional offer that is tax advantage which help them from paying tax. Until options are exercised, it is shown as worthless on company's book. Technically speaking , stock options are in form of a deferred employee compensation but as far as keeping record option pending should be excluded from recording under expense. Stock option helps in showing healthy bottom line and increases the growth of a company. When the employees exercise the option, tax deduction is allowed to the company in form of compensation expense which is the difference between strike price and the market price.

Disadvantages of Stock Option

After exercising the option to buy, many employees cash out their shares at once as they diversify their personal holdings or lock in gains. Some of them never hold their share for longer period which is the cause for loosing the motivational value of option. Some employees, as soon as they cash in their option, disappear when they come across a new wealth awaiting another quick score with a new growth company.

Another disadvantage is that the management encourage the employees to take high risk. As far as employees are concerned stock option in form of compensation is an undue risk. In case of unstable company, if large number of employees try to exercise the option to get profit in the market then there is a chance of collapse in the whole equity structure of a company. When company issue additionally a new shares to the other  investors, there is no chance for the other investors to get the upper hand as it increases the outstanding shares. In such case the company must either repurchase stock or increase its earnings which may help in forestalling the dilution of value.

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Restricted Stock

Restricted Stock is is also known as Restricted Securities or Letter Stock. In simple terms it can be said as owning a share in a company with some restrictions laid on it. Restricted Stock  never allow full transference until certain condition have been met. Only when the conditions are satisfied, the person holding the award allow full transference. Some company provide guarantee for this stock in form of compensation form. During vesting period the condition guaranteed for Restriction Stock help them in transferring the shares periodically. Another type of restriction is based on condition of performance such as financial targets or company reaching earnings per share goal.

Valuation Of Restricted Stock

Let us move on to certain factors influencing the value of Restricted Stock. In valuating the Restricted Stock the first and foremost factor that comes into one's mind is nature of the Restriction Stock and length of it. Secondly transferability of the Letter Stock Should be taken into account. Next factor influencing the valuation of the Restriction Securities is the underlying financial strength of the company. Fourthly one must be conscious of the rights of the Letter stock such as liquidation damage and registration rights. Fifth factor to be considered in valuating the Restricted Stock is the ability to borrow shares of the company as it is mostly essential for the purpose of hedging. Finally the availability of publicly traded option contract on the issued stocks should be considered as they influence the value of Restriction Stock.

In comparison with Stock Option, it motivate employees and it becomes more prominent among employees particularly for executives.

Difference Between Common Stock and Preferred Stock

In general Common and Preferred stock own a share in a company and therefore the investors can claim on the company's asset and earnings. Both investors get profit when company run successfully and regarding the way of trading, no distinct difference are found as they trade in the same way using brokerage firm and transaction cost too shows no difference.

But there are more notable difference between these two types of stock which are summarized as below.

As far as Common Stock are concerned, the investors has rights to vote the Board of Directors who are in charge of making decision. But preferred stock holder are denied of voting privileges. For Preferred Stock dividend is fixed forever whereas in case of Common Stock dividend depends on the decision of the Board of Directors. Price vary for Common Stock and Preferred Stock even though it is issued by the same company. Preferred Stock is a stable one as income is regular whereas Common Stock is volatile. Preferred Stock stuck to tax liability as the value is of higher but common stock have no tax issue.

Regarding claiming on company's asset and earnings Preferred Stock holds a higher rank. In case of favorable condition were the company growth flourishes money are distributed to the preferred stock holders in form of dividend. In case of company's bankruptcy and liquidation preferred stock holder get the payment first, Common stock holder get the payment only after the preferred stock holder, creditors and bond holder get the payment. Mostly in case of Preferred Stock the price are based on the interest rate. If the interest rate are higher then the stock price goes down and if low then the price of stock hike.

If investors anticipation is to gain a profit through hike in stock price or capital growth and dividend, then investors can go on with Common Stock. In case if investors are more likely to get incessant flow of cash in dividend form, then they can switch on to Preferred Stock. In other word Preferred Stock is similar to "Fixed -Income Security".

Types Of Stocks

Generally stocks are defined as owning a share in the company and representing a claim on the company's asset and earnings. There are two types of stock market namely common and preferred stock. 

Common Stock

As per the name indicates it is well common in comparison with Preferred stock. Common Stock carries voting right which has been practiced in corporate decision. If you have a common shares you can claim on a portion of profits. By owning a share you get one vote right per stock share and board member can be of your choice as you have rights to vote them. Regarding management board members oversees the major decision.

As far as Common Stocks are concerned, it has been revealed through study of investing and stock market that highest returns are possible when capital growth are at maximum. But Common Stock carries highest risk in the event of company's bankruptcy and liquidation. The share holder never get the amount unless tamount are paid to the creditors, bondholders and preferred stock holders.

Preferred Stock

Preferred Stock is legally entitled to receive a dividend payment to certain level. A fixed dividend is guaranteed forever. So in case of company's bankruptcy and liquidation preferred stock holder can be free of worries as they will be paid off. The stock holder has an option to convert Preferred Stock to a fixed number of common share at anytime even after a predetermined date. This type is known as convertible Preferred Share. Another option available for preferred share holder is that the company can get the shares from the share holder at anytime. As Preferred Stocks are callable the claim of share holder on the company's asset and earnings are greater. If the company's profits are higher then preferred stock holder get benefits.