Introduction

Margin trading is an interesting trading strategy because it can make a complete beginner or it can bust an investor with hundreds of thousands of dollars invested in the market. It is important to understand that this duality is present with margin trading because viewing it as an easy way to get extra money to invest and viewing it as an absolute evil that must be avoided at all costs are both incorrect and incomplete ways of looking at this particular tool. Margin trading can be extremely useful to the investor if used correctly and the following tips should help you along in your use of this extremely powerful, but extremely dangerous trading tactic.

Tip 1 – Experience is Important

Experience is extremely important in margin trading because margin trading has a lot more involved in doing it successfully than just understanding how the trading works. There are so many intangibles involved in experience (e.g. poise, intelligence, instinct and emotional control) that would come in handy for the average margin trader that experience should be viewed as extremely important when considered in the vein of margin trading. Even if you wait a few months while the act of trading becomes second nature to you, you will be ensuring that you are in far better shape to use the margin trading tactic than you were when you first started considering it. And once again it is important to reiterate that margin trading is not recommended for the starter trader.

Tip 2 – Afford ability is Paramount

When you are actually borrowing the money to spend on the margin, making sure that you can afford to lose it is something that you should absolutely have. This means that whatever stock or securities that you put up against the particular margin loan in question should be stock or securities that you can afford to lose. Looking at your portfolio, if there are any parts of it that you absolutely want to keep then make sure you do not borrow on the margin through the utilization of those parts of your portfolio. Just do not borrow on something you do not want to lose; it really is that simple.

Tip 3 – Maximization is Undesirable

If you are at all familiar with how credit scores work then you will know that one of the things that determine your particular credit rating is how much of your credit you have actually utilized. Somebody with $5,000 of credit and 100% utilization is actually far less likely to get a loan to increase their credit than someone with $50,000 of credit and 10% utilization. Even though they both owe the same amount to creditors, the latter person could owe a lot more but has not utilized their entire credit potential.

This is considered good in the financial community and it is also considered good in the stock community. It is always a good idea to keep some of your liquidity in reserve just in case something big happens and you need to (or want to) spend all of your available funding in order to take advantage of it. So if you have $10,000 available to borrow on the margin, then consider not borrowing more than $3,000 of that initially to invest and leave the other $7,000 alone just in case you find you need to make use of it later on down the road.

Tip 4 – K.I.S.S.

KISS is an acronym that stands for keep it simple, stupid. If you take a look at most of the successful investors in the world today, most of them have very simple investment strategies. One way to minimize the inherent risk of margin trading is to utilize a good broker and simple strategies that have been proven to work over and over again. This is as close as you can come to ensuring that you get a profit of some kind and the closer you come to having that kind of insurance, the lower the effective risk of margin trading actually is.