Margin trading is when you borrow money from a stockbroker to buy stocks and in return, you pay the annual interest to the stockbroker. In this day and age, margin trading has become a great way of investing without having to pay a large sum of money.
Today we’ll focus on one of the best tips for better margin trading.
1. Buy gradually
The best way to minimize losses in margin trading is to buy slowly over time and not going all-in at once. Try buying 20-40% of the positions at your first attempt and after it rises, withdraw the money you have invested and then plan your next purchase. If you bought all the positions at the first go and your stocks fell by a certain percent you would be suffering from huge losses. This is a way to avoid big losses in margin trading.
2. Understand the terms and conditions
Before investing in margin trading, you should first learn about its terms and regulations. You should be aware of all the pros and cons of the trade and the instructions your stockbroker has provided you with. This can greatly increase your overall performance in the stock trading world.
3. Interest rates
Just as any loan there are interest rates even from stockbrokers. If you are planning to take a certain loan, a stockbroker will ask for an annual interest percent of what you borrowed. Stockbrokers usually ask for about 6-7%, but make sure you know the exact interest rate so you know how much you will be paying at the end of the year.
4. Be aware of upcoming reports
When dealing with upcoming news regarding the company you have invested in, you need to be careful. People usually buy more positions of a company when they think positive news will be coming for that company. While it is a smart play to get fast profits it is also a much riskier tactic than waiting for the upcoming reports and then invest.
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5. Steer clear of margin calls
Margin calls are not a good thing to have in your margin trading account. These are warnings from your stockbroker to add more money to your account to minimize the losses or to sell your stocks.
6. Stop-loss orders
The best way to avoid big losses or margin calls in your account is to use a stop-loss order. This allows your stockbroker to automatically sell all your stocks once they fall under a certain price level. Stop-loss orders are great to minimize your loses instead of losing all your money at once.
7. Always have backup cash
There is a big risk when margin trading because the market can crash and you can lose everything in just a few minutes. So be sure not to invest every single penny you have or at least always have a backup cash fund. This can help you recover from big losses by buying new stock to earn back the money you have lost.
These are very important tips that everyone should know before entering the margin trading world.