Originally Posted by Singlelady10
When you use margin, do you have a minimum and maximum that you will use?
If you have never used it, then - just like learning about investing - start small.
Just using example numbers, but if you have $10k in securities and your
broker allows 50% ( $5k ), then try using $500 ( 10% of what you are allowed ).
( ... assuming you have almost no cash, so we can ignore it ... )
( ... also assuming that no change in the rest of the portfolio ... )
So for instance, if you have $10k of stocks and $2,500 of that is XYZ corp and
you think XYZ is going to make a move so you buy another $500 of that company.
Now, you have $10,500 invested and negative $500 in cash ( positive $500 broker loan ). You have $3,000 in XYZ corp.
Now, say XYZ moves down by about 17%.
You now have about $2,500 in XYZ and $10,000 invested and you are back to where you started. However, you still have a $500 broker loan.
If you can take that kind of pain, then go for it. If you are right, it can really pay off.
In the above example, a 17% rise means that you could sell off $500 of XYZ and still have $3,000 invested so you have a $500 profit,
but .... about $417 of that profit came from your original shares and the other $83 from the margin purchase.
Your gains were 20% better due to the margin loan.
It's just like learning to invest, you will never get a feel for it until you try it.
Just like learning to invest, if you start with money you can afford to lose, then you
won't kill yourself learning, but you will more fully understand how investing/margin works.
Margin is great for people who are right 55% of the time or more, but note that like when you take a 50% loss, you have to get a 100% gain
to make up for it. It's just that with margin, you can find yourself losing 50% with only a 10% decline if you have enough leverage.