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.

First Payment from Blogvertise ( Payment Proof )

I got my first payment from Blogvertise two days back, this is the first time I recieved payment for a blog post. Its only 9 dollars but it gave me something to cheer about.  If you like to join Blogvertise click here.