“Opportunities don’t happen. You create them.” According to this quote by Chris Grosser, you can create your own opportunities for a financially brighter future. One of the best ways considered by many to do this is by investing in stocks. But what if you don’t have millions to do it? Well, in this article you’ll find out that margin investments might be right for you.
Like any other investment tool, margin investments have their advantages as well as disadvantages. However, if you learn how to use them appropriately, you can see positive results because, according to professional traders, it is a very efficient way to use your capital.
What is a margin investment?
We are ready to learn more about margin investments, so let’s get into it.
Margin investing (also known as leverage trading) is a tool that helps investors have more buying power and use less of their own money in the total amount of an investment.
In simpler words, the trader asks for a loan from his broker to make the profit bigger, so he only pays a certain percentage of the full value of the deal. The money he borrows from the brokerage firm needs to be returned before the time limit agreed upon.
How do margin investments actually work?
Confusing? Let’s see an example to make it easier…
Let’s say you are a stamp collector. You own hundreds of rare stamps from around the world. You read online that in Peru you can find very exclusive and commemorative stamps that might be sold for a fantastic price in your country. Therefore, you decide to take a vacation trip to look for them. The only problem is that you don’t have enough money to buy all the stamps you would want, so you ask your brother to lend you the cash you are missing. Without a problem, he lends you the money and wishes you all the best on your trip.
After having a blast on your vacation in Peru, you return with a bunch of exclusive stamps, thinking they would sell well back at home. Right after greeting your family, you post your stamps online, hoping to get the best profit out of them.
If the stamps sell at the price you expect, your revenue will cover your initial investment, your brother’s loan, and provide an extra profit for yourself. You could say the trip was worth it!
However, if it happens that nobody back home likes your exotic stamps, you would have a big loss, also keeping in mind that you must return the money you borrowed from your brother.
Easier to understand, right? The exact same thing we talked about with stamps happens with stocks.
Now let’s say you are an investor looking to buy $100 worth of stocks. If you don’t have that amount of money just laying around in your savings account, you could start searching for a brokerage firm that can lend you the missing money.
If you use a margin investment loan, you would only need to have a portion of the total amount in your capital. It is recommended that you have at least 50% of the money you’ll invest. Therefore, in this example, you would need only $50. The other half of the investment would be loaned by your broker.
Supposing that the stock prices jump 25% once you’ve already bought them, the initial value of your investment will increase to $125. At this moment, you could sell your stocks to return the $50 back to the brokerage firm and put your $50 back in your savings account, which means you made a $25 profit!
Why might margin investments be right for you?
Margin investments might be right for you for many reasons, but we will focus on the most important. By using this tool, you can invest more money using less of your own capital. Asking your broker for credit lets you invest in stocks while saving money from your account. Of course you’ll have to pay the loan at some point, but it is a way to increase the profit of your investments.
Taking this into account, perhaps you may think that margin investments are a perfect choice for every investor. However, that’s not necessarily the case. Trading with leverage is not always a bed of roses; one of the main risks of margin investments comes when stock prices move against the predictions you’ve done, which could increase the potential loss.
Let’s use the same example from earlier.
Perhaps the stocks you bought for $100 drop 25% in value. The total value of the investment is reduced to $75. After you return the $50 you borrowed from your brokerage firm, you’ll only have $25 left, meaning that you had a total loss of $25.
Keeping in mind this risk related to margin investments, you always need to analyze and study what the best companies to invest in are and how to and get the best possible results.
For this reason, it isn’t recommended to invest in random stocks that you don’t know anything about, that could actually lose you money.
Due to the volatility of the market, nobody can know for sure if stock prices are going to increase or take a dive. Therefore, margin investments could be a better choice for experienced investors who have more experience dealing with market forces.
Don’t have experience with investments yet? Don’t worry, you can learn the basics about margin and leverage trading in this article.
Wrapping it up
Margin investing is a tool created to help investors have more buying power in the market and pay less money than the total value of an initial investment. Keep in mind that you’ll need to have at least half of the money you want to invest, in order to get the loan of the remaining amount from a brokerage company.
This tool might be right for you if you already have some experience trading stocks and understand how the market behaves. If your calculations on stock prices are right, your profit and the initial value of your stocks could increase.
One of the safest and easiest ways of doing this kind of investment is through FlexInvest platform. You can invest in global stock markets using margin investments. To help you along the way, make sure to take a look at the rest of the articles in our blog to learn more and get ready for your investing journey.
