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Monday, May 7, 2007

Margin Trading - Advantages and Disadvantages

Trading on margin greatly increases a traders buying power. It provides him an opportunity to make enormous profits using lesser money. Margin trading is a very common trading strategy that has both merits and demerits; and the success depends on many factors, both manageable and unmanageable.

Advantages of Margin Trading
  • Increased buying power with less money.
  • More profit with less investment.
  • A trader can burrow up to half of his purchasing price as initial margin.
  • Greatly suitable for day traders, who need to complete more number of trades with higher volume stocks.
  • Suitable for experienced traders, having knowledge of stock market trend patterns.
Disadvantages of Margin Trading
  • Add more burdens on traders’ shoulders in losing trades.
  • Have to payoff interest on margin.
  • Cannot trade all stocks - like OTC stocks, penny stocks, IPOs etc.
  • Your account balance and buying power changes with changes in stock prices.
  • The chance of margin call is always prevailing.
  • You are always obligated to keep a minimum account – the maintenance margin.
  • With falling stock prices the traders have much less control.
  • Not advocated for novice traders.

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