When trading stocks, what is your strategy? Are you more of a swing trader, or are you a day trader looking at L2 data and dissecting charts? Do you trade options, and do you operate on margin? Margin means extra risk, but you can make more money.
What about those margin calls? Let’s be honest, margin isn’t easy to understand for someone who is just starting. It seems simple enough, but the math can get quite complicated when everything is factored into the equation. You certainly don’t want to leverage yourself to the point that you get margin called while your securities are losing money on paper.
You are going to make some good trades, but there will be times when your trades are losing money. When that happens, you can have stop loss orders in place. But if you want to hang on for a reversal, you can’t do that if you get margin called. You will have to sell securities to cover what you owe.
Granted, if you have positions that are making you money, you can sell them for a profit to cover your losses while you wait for the other positions to recover. But if you can’t do that, you have to liquidate the position that is losing money, at a greater loss. Your only other option is to avoid the margin call by depositing more money.
You should always be on top of your margin trading. Know your risks and have a solid game plan. Brokerages are rather lenient in terms of amounts when it comes to avoiding margin calls. They aren’t going to margin call you for losing a little bit of money. Yet you aren’t in control of what the market does, and it is possible to lose money more quickly than you might think.
Have you ever come close to a margin call before? Maybe you just got started with margin, and you are simply testing the waters. I have been an investor for years, and I just got started with both options and margin not too long ago. I had studied options to a degree awhile back, and I had sold one covered call. But I was in my 20s and without a firm understanding of options.
It took me awhile to want to revisit them and understand exactly why they are a good idea. The same thing goes for margin. I think margin accounts are wonderful, but you want to use what you get wisely. You want to target a return much larger than the margin interest rate.
It is much easier said than done, but the risk is worth it with the right steps taken towards diversification. Take your time when it comes to using margin and work you way up slowly. Don’t keep your foot on the gas when it comes to leverage because you want to be sure you that you have your bases covered. Be careful, and build your investment business wisely.