Welcome to Professor Savings.
We teach finance basics.
Hi I’m your host today Rayfil Wong.
Margin is a loan given by brokers to investors who use the borrowed money to purchase stock sharescand other types of securities and use cash and other assets held in the brokerage account as collateral.
We will get to an example in a minute.
Main reason Investors and traders use margin is to increase their purchasing power.
Thereby maximizing potential gains on winning positions.
Typically, an initial margin of 50% is required to enter a position for a margin able security.
For example; let’s say Jane buys $100 worth of stock.
She funds half of the transaction with money loan from her broker.
The other half from cash in her account.
After a positive earnings announcement the stock price jumps 25%, increasing the value of Jacob’s initial investment to $125.
She decides to sell his position and return the $50 he borrowed from margin back to his broker. Jane is left with the profit of $25 as oppose to the $12.25 he would have earned, had he bought the stock with only $50.
Jane profited in this example, have the stock decreased by 50% thereby having his investment value to $50. She would have had to repay the borrowed $50 back to his broker leaving him with the 100% loss.
Thus, it is important to fully understand the associated risks prior to trading with margin as the possibility of substantial gains is matched by significant losses.
so our tip is that if you do buy on margin, start off with a smaller amount so you that you understand the math and possible psychology stress behind it.
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