Cuapa Asset Management

So you want to get into stock trading, but you don’t have enough cash to make any meaningful gains even if you were to call the market correctly every day for a month. Fortunately for you, it is possible to trade buy stocks on margin, enabling you to maximize your gains even if you only have a couple thousand dollars to invest.

So what exactly is margin trading? Margin trading involves purchasing stocks on credit from the trader’s broker rather than with the funds a trader already has in his account. The margin trader uses equity or cash in his account to “leverage” his portfolio by using it as collateral to invest more cash than he actually possesses. Most brokers have a few requirements:

-Creditworthiness. A credit check is often run on prospective margin traders to ensure that they can pay their debts. Make sure that prior to applying for a margin trading account, that you don’t have any outstanding debts which you have failed to make payments on.

-Suitability for the trader. Brokers will want to know that you aren’t getting in over your head. Build up some time on a cash account basis first so that you have some experience to fill out on your trading profile and the broker will be willing to give you the higher trading level of “margin.” Otherwise, they may want to stick you in a cash account first prior to letting you make riskier trades.

-Minimum opening balance. Because margin trading would be useless without being able to cover the commissions, most brokers require a minimum balance to trade on margin. This can range from $1,000 to $2,500 or even higher depending on the broker and the region’s exchange regulations, so make sure you have enough to meet the minimum opening requirement.

-Initial margin. You must initially have a minimum of 50% collateral for your margin trade within your account, as required by law in US trading accounts. Your broker may require that you have even greater collateral when you initially purchase the stock.

-Maintenance margin. Under US law, you must maintain at least 25% collateral for the stocks you hold on margin, but as with the initial margin, brokers may increase this requirement.

The creditworthiness, trader suitability, minimum opening balance, and initial margin requirement are all fairly straightforward, but what happens if the stock falls and the trader meets to meet the maintenance margin requirement?

Failing to meet the maintenance margin means that there will be a “margin call” by the broker. The broker will force you to sell the holdings you have to protect against complete loss, and you will have to cover the losses by paying back the broker.

Remember to ensure that your stock is not so volatile that you could quickly fail to meet your maintenance margin requirement and be forced to cash out prior to the upswing of your investment. This will protect you against constant losses and no gains.