|A deposit made by a trader with a clearinghouse to ensure that he/she will fulfill any financial obligations resulting from his or her trades.
Margin is the amount of money a company will lend you against the security of the investment you buy.
In its most basic sense, margin is the amount of money you are required to have in the trade. It is extended by brokerage firms to offer assistance in buying stock. A brokerage firm may loan from 1% to 50% of the purchase value of a stock or opt not to extend margin at all.
There will be interest charges against the money value provided by the brokerage firm. The good news is that the interest charges are very small, typically less than 1 % a month.
Margin can be your best friend and your worst enemy. Buying on margin gives the ability to double returns on a stock price movement.
Example: You dec de to buy 500 shares ofINTC which is trading at $28 a share. Instead of putting up $14,000 to purchase the stock, you put up $7,000 while your brokerage firm provides the remaining $7,000. One month later when the stock hits resistance at $31 you sell your stock for $15,500.
Let's see what the use of margin did to your bottom-line profits. You spent $7,000 of your money to generate $1,500 in profits. That is a 21.4% rate of return for the month that you were in the trade, and you paid less than $70 in interest charges to your brokerage firm. That is good business. That is the good news.
The bad news happens when the stock goes down in value. When your stock declines in price to an equity position below a certain value you will receive a "margin call". The brokerage firm is not concerned about the equity loss in your half of the trade, but they are very concerned about their half of the trade and they have the right to call in their portion of the trade. A good rule of thumb is not to borrow money that you cannot pay back if needed. In the event you cannot pay what you owe for the "margin call", the brokerage firm has the authority to sell any stock in your account to satisfy the margin requirement.
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