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umfan92

Questions About Margin Accounts.

By umfan92, in Beginners Forum

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umfan92    10

umfan92
Posted

Hey everyone. First of all, I would like to say that I have no intentions of acquiring a margin account for at least several months (mostly likely more than a year). I am just curious about it though. How does a margin account work? I know you have to have a certain amount of money in account, but that's not what I mean.

 

What I mean is: Because you have a margin account, can you use it like a cash account? I know margin means that you're borrowing money from the broker to have more capital with which to trade. But do you have to use margin if you have a margin account?

 

What about shorting? I know you have to have a margin account but does that necessarily mean that you have to use margin? And if you do, how does it work?

 

Also, one more question. How does the VIX work and can I find the VIX by typing that in as if it were a ticker? Is that the actual VIX (volatility index).

 

Thanks everyone, I look forward to your responses.

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JnrTrader    10

JnrTrader
Posted

If your Account uses margin then you will use margin for every single trade whether you want to or not. :) you have to set your account to no margin if you dont ever want to use it but life with out margin is very very .... Very SLOW.

 

:P

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umfan92    10

umfan92
Posted

Thanks for the response. What do you mean very slow? And what happens when you use margin? You borrow money from the broker to trade right? Then what? Don't you get charged a percentage? How does it work?

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JnrTrader    10

JnrTrader
Posted

Its all about risk vs return. the higher your leverage the more return and risk you can expect. Low leverage = high margin requirements = lower returns.

 

you borrow money yes and you get charged the carry over fee. so yes you do pay interest on the money you loan :)

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Elitny    10

Elitny
Posted
If your Account uses margin then you will use margin for every single trade whether you want to or not. :) you have to set your account to no margin if you dont ever want to use it but life with out margin is very very .... Very SLOW.

 

:P

 

 

 

Depends.. if your account value is enough to cover all of your open positions margin is the way to go. However, if you are leveraging beyond what your balance is, if the market gaps you can end up owing.

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eqsys    10

eqsys
Posted

In a cash account if you sell a stock you have to wait for the transaction to "clear" - so you don't have the money to use again for 3 days. In a margin account you can buy stock immediately at some brokerages, and the next day in others. The 3 day clearing rule can be a big problem - if the market starts to fall and your stops are hit, you are out. If the market rebounds you can't buy back in for 3 days, so you may miss the rebound.

 

If you are trading options there is a one day clearing for either margin or stock accounts so it doesn't make any difference.

 

On my trading platform the VIX is $VIX.X

 

There is a stock (actually ETF) that you can buy that is based on the VIX futures - symbol is VXX.The market goes up, the VXX goes down. There is also the TVIX (more leverage) and XIV - market goes up, XIV goes up. These trading instruments are highly leveraged and trade more like options.

 

Leverage can be a wonderful thing and a terrible thing. Most traders that wipe out do so because they are overleveraged and overconfident.

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