Can Anyone Explain Margin In Laymans Terms... Please :)

[shane 10]

Hello, I have been day trading for under a year... I use Interactive Brokers but I usually only get to trade one or two days during each week because Once I use my cash, I cannot use it again until it clears which takes 3 or 4 days.

 

I do not use margin, but I've been reading about it. I'm assuming that if I signup as a margin account, I will then be able to double the money I have to use for trades?

 

(1) Lets say I have $30,000 cash account. If I signup for a margin account, will I then be able to trade with $60,000? Thus allowing me to trade more than one or two days per week?

 

(2) If I close all positions before the end of each day, do I still have to pay interests on the margin money? (I ask because I read an article that seemed to say that).

 

(3) Do any of you use a margin account, and if so, do you feel like sharing any pros and cons?

 

basically I feel like I'm doing pretty good with my trades overall, but just not making a lot of money because I enter and exit pretty quickly with low amounts of shares (100 - 300). If I had more, I could jump back in at the next reversal or just in general trade on more days than just one or two.

 

Well thanks for any advice and I look forward to being a member of this forum. I just foudn it today and I have spent hours reading through it already! lol. Im about to go eat finally. LOL

[MCM 10]

For any broker - best to seek out there own words.

Margin

 

Once you switch to a margin account - if your trading STOCKS - if you borrow money to purchase a stock - you will pay interest. I am not sure when IB charges it - there rates are low (money is cheap right now...right?).

 

Regarding specifics - you can borrow up to 50% of the price of the security to purchase on margin. And you must maintain adleast 25% of the total market value of the securities you own within the margin account. (So if you have a portfolio worth 200K, you need to have adleast 50K in the account). If your a pattern day trader - you need to have at the bare minimum 25K in the account or 25% of portfolio - whichever is greater.

 

So...if your looking for advice...I would tell you - forget the above. Dont trade on margin. Wait until you have 2 or 3 years of success under your belt.

 

The reason your not making alot of money has NOTHING to do with not trading on margin. It has to do with either too early profit targets, too late of stop exits, or poor trade selection. There are a tremendous amount of very successful traders who trade unleveraged. If you want to leverage up - adleast get some solid success in the rear view mirror. Otherwise you are just asking to be blotted out quicker than the usual wash out rate.

 

Remember...this is a profession. You don't start skiing on double diamonds or chutes in Jackson Hole. You start on the bunny hill. Enjoy the experience.

 

Good luck

[shane 10]

Thanks MCM

I appreciate the reply and advice

[sergso 10]

Margin is a loan from the broker to buy stocks. Margin is also a percentage of notional value you need to deposit to trade a futures contract or a forex lot.

 

I try to avoid using margin as much as possible because if things go bad traders on margin lose everything they have made for many months or years in just one day.

[shane 10]

Thanks sergso,

yeah Im going to just stay away from it too

[4EverMaAT 10]

Anyone who treats trading as a business would want to multiply their efforts as quickly as possible. There is no other liquid business in the world that allows the amount of leverage that stocks/futures/forex/etc derivatives offer. So with a successful trading strategy, I wouldn't see a reason NOT to use the extra buying power to scale as much as the mechanical limits allow.

 

Sure you can just run one restaurant all the time. But why not have two restaurants? 4? 10? etc if you could afford it?

[sergso 10]

  4EverMaAT said:

Anyone who treats trading as a business would want to multiply their efforts as quickly as possible. There is no other liquid business in the world that allows the amount of leverage that stocks/futures/forex/etc derivatives offer. So with a successful trading strategy, I wouldn't see a reason NOT to use the extra buying power to scale as much as the mechanical limits allow..

 

If you do not see a reason now see what happened in 2008 when investors on margin, not even traders, were liquidated just before the market bottom.

[1a2b3cppp 10]

  shane said:

Hello, I have been day trading for under a year... I use Interactive Brokers but I usually only get to trade one or two days during each week because Once I use my cash, I cannot use it again until it clears which takes 3 or 4 days.

 

I do not use margin, but I've been reading about it. I'm assuming that if I signup as a margin account, I will then be able to double the money I have to use for trades?

 

Theoretically yes. Assuming you are talking about stock trades, you may have double the money (or 4x if you're a pattern day trader).

 

Other markets may have their own leverage system so for now we're only talking about stocks.

 

  Quote

(1) Lets say I have $30,000 cash account. If I signup for a margin account, will I then be able to trade with $60,000?

 

Yes. Your account will say something like this:

 

Cash balance: $30,000

Buying Power (non-Margin): $30,000

Buying Power (Margin): $60,000

 

These values may change depending on if you currently have any positions. Different stocks may require different levels.

 

If you do more than 3 round trips in a week and your account gets labeled as a pattern day trader, you may get 4x margin.

 

  Quote

Thus allowing me to trade more than one or two days per week?

 

A margin account lets you bypass the waiting period for funds to become available.

 

  Quote

(2) If I close all positions before the end of each day, do I still have to pay interests on the margin money? (I ask because I read an article that seemed to say that).

 

No.

 

  Quote

(3) Do any of you use a margin account, and if so, do you feel like sharing any pros and cons?

 

I have 2x margin in my account (I don't day trade stocks) but I don't actually use the margin, it's just there because I happen to have a margin account.

 

Keep in mind that just because you have margin doesn't mean you have to use it. In the example you gave with a $30,000 account, even if you have a margin account and they give you $60,000 buying power, as long as you don't buy more than $30,000 worth of stock you won't be using margin and you won't be charged any interest.

 

  Quote

basically I feel like I'm doing pretty good with my trades overall, but just not making a lot of money because I enter and exit pretty quickly with low amounts of shares (100 - 300). If I had more, I could jump back in at the next reversal or just in general trade on more days than just one or two.

 

Correct, it would be available immediately.

[shane 10]

Thanks a lot 1a2b3cppp! and everyone else as well for all of the input.

 

There is obviously a lot of pros and cons to using margin. Im glad I asked the question.

 

I was about to just stay away from it, but now after 1a2b3cppp's comment, I'm interested again. lol. I'm on a roller coaster...

 

 

One person replied with the following, "if things go bad traders on margin lose everything they have made for many months or years in just one day"

 

So let me ask a follow up question...

 

- Assume this scenario: I'm day trading stocks only, and closing out all positions before the end of the day.... and on bad trades, Im selling off the stocks for a small loss before the price falls too far...

 

My question: Wouldn't the broker just take back the money that was loaned? and therefore basically just close positions? lets say you bought 100 shares of ABC stock for $25. then that day The broker forces you to close positions.. You dont lose all the money right? if the stock was selling at $24, then you basically just lose $100, right? If that is correct, it doesn't seem that bad of a deal.

 

Am i understanding correctly yet?

 

Thanks again!