Introduction

Margin trading is a strategy that has been around for a very long time and if a complete beginner to investing has heard of any investment strategy before, chances are the one they have heard of is the margin trading strategy. Margin trading can be responsible for amazing gains in the stock market by a single individual over a short period of time or alternatively it can be responsible for the utter collapse of a stock market if too many people do it to little effect. For this reason, Margin Trading is not recommended for beginners but at the same time there are a number of intermediate and advanced traders that will do it on a regular basis.

Margin Trading

Margin trading, quite simply put, is the process of utilizing the resources that you currently have in order to get more resources with which to trade. So for example, if your broker allowed 1:1 margin trading and you had $10,000 to invest in the stock market, you could purchase $10,000 worth of stock and then leverage that stock in order to get another $10,000 to invest. You are essentially putting the money you have up as collateral against the loan and thereby extracting extra money that you can put into the stocks that you have. One to one margin investment is usually what the average stock broker will allow although there are other forms of trading (i.e. Forex) where 10:1 or even 100:1 margin trading is sometimes allowed by different brokers.

Advantages of Margin Trading

There are many advantages inherent to trading on the margin but they all are related to the primary advantage of margin trading which is that you are going to get the chance to trade with more money. There are a number of things that will be advantageous to you if you find a positive trading situation and put more money into it. For starters, the profit that you make will be larger. If you utilize a margin trade and end up investing in a profitable situation with twice as much money as a result then your profit is going to be twice as much minus the internet on the margin loan.

This is an important consideration to make because people have been known to make extremely safe investments periodically with margin loans in order to increase the amount of profit they got out of those investments. This does not mean that their entire trading strategy revolved around margin trading, but it does mean that it was an important part of their overall strategy.

Disadvantages of Margin Trading

Just as with the advantages of margin trading, there are many disadvantages to the practice as well. And just as with the advantages of margin trading, almost all of those disadvantages stem from the fact that trading on the margin is extremely risky. Trading on the margin is the same thing as trading with loan money, the only difference being that you are leveraging your actual invested money in order to get the loan rather than something you can not afford to lose like your house or your car. This makes margin trading far more acceptable as a strategy than actually taking a loan out, but it does still lend itself to difficulty in many situations.

Margin trading in excess is what partially led to the great stock market crash of 1929 because it got to the point where traders were lending money to investors that they did not have and therefore investors were spending borrowed money that did not actually exist. Such a situation is unsustainable in the long run which is why most of the brokers nowadays have very strict rules regarding margin trading.