Leveraged Trading: How to avoid going Bankrupt Buying Stocks on Margin?

Leveraged trading isn’t something new, but at the same time we cannot deny that only professionals are capable of making money buying stocks on margin. Margin trading involves risks that are way beyond an average traders’ appetite. It’s risky business! But, we cannot ignore the benefits of trading on margin as for someone who learns to effectively use leverage, can really boost portfolio returns dramatically. As far as the drawbacks of margin trading are concerned, a newbie can easily get trapped in this tempting business and lose everything that’s on stake.

Yes, margin trading is so tempting for some that they keep pouring money in their margin accounts, despite getting wiped-out again and again. Personally, I have been through difficult trading phases and the very thought of getting a “Margin Call” still haunts me. I guess you can learn a thing or two my experience, and hopefully you won’t find margin trading a daunting task anymore.

Social Media & Leveraged Trading: A Nasty Combo

Nowadays, traders are relying more and more on social media, and that’s one reason why trading on margin can become a dangerous play for someone new. You can easily find tweets and Facebook updates from traders, all bragging about their winning trades. People do make loads of money by using the power of leverage; some even double their money in a single trading session. Now, you may want to follow such traders for tips and strategies, and that’s where you may be headed for an emotional trap. You should understand that even successful traders don’t make money every day or on every trade.

What if you place all your bets on a wrong trade? Well, that’s a serious question you should ask yourself every time you trade on margin money. You should not pay much heed to what people share through social media, as they may not be publically sharing about their loss making trades which are squared-off forcefully by their broker.

Buying Stocks on Margin is Complicated! Here’s what you Must Know

When you start trading with a margin account, you actually buy stocks on credit. This margin can be given against cash in your account and against qualifying securities that can be used as collateral. The margin is no free money as you have to pay interest on borrowed funds.

So, you need to keep your eyes wide open as, by borrowing more than you can afford you can easily end up bankrupt.

Leveraged trading best suits disciplined traders who can well manage their emotions and only take calculated risks.

The worst part of using leverage is that your positions can be closed without your consent, which can result in heavy losses. Then you have to consider the hefty costs which include commissions, interest charged and regulatory fee. On top of that, your broker can change margin requirements at any time, so you may need additional funds to keep afloat.

Leverage is an effective tool but only if you risk what you can afford to lose. Over-leveraging is just like taking a big loan, bigger than you can repay. So, learn the basics of trading, and make sure you don’t start gambling with borrowed money. Otherwise, you know how it ends for those who try act brave with brutal markets.

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