How to Trade on Margin

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When you open an account with your stockbroker or bank to trade stocks, your stockbroker expects you to fund it. To buy and sell stocks, you use the funds in your account but when you buy more stocks than the funds in your account will cover, you engage in margin trading. Your broker lends you the money and withdraws it plus interest when you sell the stocks.

  • Open a stock trading account with the stockbroker or bank of your choice. Be sure this account has margin trading option. Fund your trading account. Most stockbrokers and banks accept funding through wire transfers, money orders, bank-to-bank transfers, and personal and business checks.

  • Research the stock market. Read various stock-related newspapers and magazines to familiarize yourself with the stock market. Visit stock research websites like Morningstar and Yahoo! Finance, and research various stocks. Note the stocks that are moving up. Research and understand the direction of the economy and stock market. See Resources below for additional information.

  • Log onto your trading account with the stockbroker and trade on margin. Find stocks that are moving up, enter the symbols or tickers for that stocks, the number of shares you want to buy and place your order. If the amount required to execute the order is more than you have in your account, your stockbroker will lend you the difference or allow you to buy on margin.

  • Monitor your stock price and sell when you have made a profit. Your stockbroker will deduct the margin cost plus interest and deposit the difference in your account.

Tips & Warnings

  • Trading or buying stocks on margin is a profitable way to increase your earnings in the stock market but it can lead to disaster. If you don’t sell your stocks quickly and you lose money, your loss multiplies quicker because you are trading on borrowed funds.
  • If the value of the loss in your margin account exceeds the value of your stock holdings, your stockbroker will call you and request that you deposit additional funds into your account. This is a Margin Call, and you will be required to comply immediately or face legal action.
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