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Utopia | Why do day traders suggest trade on Margin? |
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walt17jr
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The "why" has to do with SEC regulations. If you make 4 or more day trades within any 5 consecutive business days, you must have a margin account. |
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michael_w_anderson
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Margin is basically borrowing money from the investment house you are trading with to purchase stocks. If you sell the stocks before the end of the trading session, you don't pay any interest on the money you borrowed. The investment house sets up an account for you and basically sets a limit on what you can margin based on your asset worth in the account. The problem with trading on margin is that if you purchase a stock at one price and the stock price goes down, you don't want to sell it and take a loss so you carry it over into the next trading day incurring an interest charge as you do. Plus, if the stock drops more than a certain % amount in value against the amount you "borrowed", there is what is called a margin call. This is money you have to deposit in the account within a certain amount of time to make up the difference in value, otherwise your stock will be sold to make up the call. Hope that helps without being too boring. |
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Nick Z
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Using Margin allows you to trade not just with your own money but also with money borrowed from your brokerage company. Since the amount of money you make from buying and selling stocks is a percentage of the money you are trading with. It means that the more money you trade with, the more money you can make.
Of course, using margin is beneficial when your stock trading is profitable. But since your losses are also a percentage of the money you are trading with. It means that the more money you are trading with, the more money you can loose.
Many day-traders don't have enough of their own money to make stock trading worthwhile. And that's why they use margin. But using margin is risky because with margin you can loose more money than you have. You can loose all of your money and end up in debt on top of that. |
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Fair R
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Trading on margin can let you earn fast...but also lose fast.
It is not good for a conservative or unskilled investor. |
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piet lul
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they like to get burned faster. |
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Joseph T
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Because most day-traders are broke and margin is all they have.
Day-trading was the "work at home" get rich quick scheme of 5 years ago, you need to get with the time and try some nigerian money schemes or something. |
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Sang Suci
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When you day trade, the price movement you can expect is not very high compared to ,say, if you week trade or month trade. Thus, to cover your transaction cost and make your effort worthwhile, you need to have large enough capital. Margin is one way to magnify your return (and your losses). |
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J
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Because they are crazy (or most are). Basically, instead of paying in full for the trade you put a downpayment and borrow the rest. You pledge the securities you bought as collateral for the loan. So with $10,000 you may be able to buy $ 40000 woth of stock instead of $ 10 000. You now control 4 times the number of shares with the same investment. If the stock goes up you make 4 times the gain (less loan costs).
If the stocks go down (like the last few weeks) the brokerage firm gets concerned that the collateral isn't enough to pay off your loan. So they request cash from you or start selling the stock you put up as collateral. This was a a major factor in the crash of 1929. Day traders must feel that because they are in and out of stocks so quickly that they can avoid being caught short and by using margin they can get more bang for their buck. The bang works both ways you can not only lose the $10,000 but you are on the hook for the whole loan amount. Day traders are gamblers not investors - if you told dedicated gamblers that they could play on margin they would most like jump at the chance. Stay away from day trading - it makes money for the brokerage firms but rarely for anyone else. |
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