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)
