Advantages of Margin Trading

Why use margin? It's all about leverage. Just as companies borrow money to invest in projects, investors can borrow money and leverage the cash they invest. Leverage amplifies every point that a stock goes up. If you pick the right investment, margin can dramatically increase your profit.

A 50% initial margin allows you to buy up to twice as much stock as you could with just the cash in your account. It's easy to see how you could make significantly more money by using a margin account than by trading from a pure cash position. What really matters is whether your stock rises or not. The investing world will always debate whether it's possible to consistently pick winning stocks. We won't weigh in on that debate here, but simply say that margin does offer the opportunity to amplify your returns.

The best way to demonstrate the power of leverage is with an example. Let's imagine a situation that we'd all love to be in - one that results in hugely exaggerated profits:

We'll keep with the numbers of $20,000 worth of securities bought using $10,000 of margin and $10,000 of cash. Cory's Tequila Co. is trading at $100 and you feel that it will rise dramatically. Normally, you'd only be able to buy 100 shares (100 x $100 = $10,000). Since you're investing on margin, you have the ability to buy 200 shares (200 x $100 = $20,000).

Cory's Tequila Co. then locks in Jennifer Lopez as a spokeswoman and the price of shares skyrockets 25%. Your investment is now worth $25,000 (200 shares x $125) and you decide to cash out. After paying back your broker the $10,000 you originally borrowed, you get $15,000, $5,000 of which is profit. That's a 50% return even though the stock only went up 25%. Keep in mind that to simplify this transaction, we didn't take into account commissions and interest. Otherwise, these costs would be deducted from you profit.

http://www.investopedia.com/university/margin/margin3.asp

Margin Trading

Imagine this: you're sitting at the blackjack table and the dealer throws you an ace. You'd love to increase your bet, but you're a little short on cash. Luckily, your friend offers to spot you $50 and says you can pay him back later. Tempting, isn't it? If the cards are dealt right, you can win big and pay your buddy back his $50 with profits to spare. But what if you lose? Not only will you be down your original bet, but you'll still owe your friend $50. Borrowing money at the casino is like gambling-on-steroids: the stakes are high and your potential for profit is dramatically increased. Conversely, your risk is also increased.

Investing on margin isn't necessarily gambling. But you can draw some parallels between margin trading and the casino. Margin is a high-risk strategy that can yield a huge profit if executed correctly. The dark side of margin is that you can lose your shirt and any other assets you're wearing. One of the only things riskier than investing on margin is investing on margin without understanding what you're doing.

Margin Trading

• What is Margin Trading? It is the trading of stocks thru margin buying. As defined in wikipedia, margin buying is when the trader borrows money (at interest) to buy a stock and hopes for it to rise (http://en.wikipedia.org/wiki/Stock_market#Margin_buying).
• How do you do Margin Trading? Since you'l be using other people's money in margin trading, you need to invest in stocks with erratic prices. You buy the stocks when it is in its low(est) prices and immediatly sell it off when it gives you a little gain rather than wait for it to hit high prices. In my case, I usually sell my stocks immediately when it makes a 2% gain or when it hit 2 to 3 fluctuations higher. In the end of the month, you could make enough gain to pay off your monthly loan amortization.
• How do you start Margin Trading? As a start, you could use your own savings to invest in the stock market. You search for a reliable online stock broker and deposit your funds with them. Now you could start trading by purchasing stocks (As an advice, its better to start with low-cap speculative stocks). When you'll get a feel of the game, you could start to borrow funds from friends and relatives to increase your equity. You could also take advantage of margin facilities offered by your stock brokers. Or you could even make personal loans from bank offering as low as .88% per month.

How it all started

I enrolled in the elective subject, Investment and Portfolio Management for my MBA-Regis degree in Ateneo Graduate School of Business (http://www.gsb.ateneo.edu/index.php?p=367). As a course requirement, our Professor, Mr. Lito Biacora, instructed our class to invest in any stocks from the PSE. (I attached the picture of our class taken during our culmination lunch.)

After doing some research of the different online stock brokers, i decided to invest with Citiseconline (http://www.citiseconline.com/) because of the comprehensiveness its site. I bought shares from EPCI (now BDO) prior to the announcement of the acquisition of Banco de Oro. I immediately made a return of almost 10% in less than a month after the merger announcement. This encouraged me to get into stock market investment until it made me decide to borrow more funds to add to my investment. Thats how I started margin trading.

My Blog

I long want to set up my own blog spot to share my little knowledge about trading in the Philippines stock market. I have been trading stocks online (with http://www.citiseconline.com/) for the pass 10 months. and i'm doing margin trading by borrowing funds from friends and relatives (and also with the stock broker's margin facility) and making use of my earnings from trading to pay off the monthly loan amortization. I develop some techniques of analyzing stocks and I'm sharing my two-cents worth of knowledge in my margin trading experience thru this blog. I also plan to give out some of my "good buy" stocks suggestions for the day. Happy trading.