MARGIN

Consider this, if you bought a stock and set a 5% stop loss on it, and you are buying it on margin, instead of losing 5% of your capital, you now could lose 20% of it. Here is a real dollars and cents demonstration of how this can happen. (Commissions are not going to be figured into this demonstration)

Cash Account: You buy 100 shares of XYZ @ $10 = $1000.00 capital. You set a 5% stop at $9.50. The price falls and you get stopped out. 100 shares @ $9.50 = $950.00 of capital remaining.

2X Margin Account: You are going to use that same $1000 to buy XYZ, but with your margin, you can buy twice as much. You buy 200 shares of XYZ @ $10. You put up $1000 of your capital, and your broker matches that with $1000 of margin for the total purchase price of $2000.00 You set the same stop, and it gets hit. So there is $1900 from the sale of the 200 shares, FIRST you have to pay back the $1000 of margin to your broker, that leaves you $900 of your capital remaining. You started with $1000 of your capital, and now only have $900 left, that is a 10% loss of YOUR MONEY!

4X Margin Account: You can now buy 400 shares of XYZ @ 10, you still put up the same $1000 of your capital, and your broker puts up the remaining $3000. Same stop is used. When it is hit, the first thing you have to do out of the $3800 you get from selling 400 shares of XYZ @ $9.50, is to pay back the $3000 to your broker, that leaves you $800 out of the $1000 that you started with. That is a 20% loss of YOUR MONEY!

And another bad aspect to this, is now you only have $800 left, so with 4X margin your buying power is down from $4000 to $3200, so you can not even buy the 400 shares of XYZ back unless it falls to $8. So not only does the 4X take away more of your capital on a "small" loss, but it also drastically reduces your buying power.



00K

Good luck trading...


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