Many traders quickly look to open brokerage accounts as they dive into the depths of trading. When opening a brokerage account, like TradeZero, you will learn that there are different types of accounts you can open. New traders can be very confused and lost when trying to figure out the benefits and risks associated with different account types. Today the discussion will be about margin accounts and margin trading. Margin accounts can be extremely powerful or risky, so it is imperative that traders know the risks and potential that comes with margin trading before they take on any exposure to the market.
What is Margin?
To start off it is important to know what margin is. Margin is essentially borrowed cash from a broker. Say a trader only has $2,500 dollars but wants to take $5,000 positions. The trader would need to open a margin account in order to trade with that much buying power. Some people also refer to margin as leverage. Most brokers offer margin accounts. However different brokers will allow different levels of margin, and might even limit the amount of margin that smaller traders can use. You can learn more about margin based on your residency by reaching out to the online 24/7 customer support.
Risks and Benefits of Using Margin
With increased buying power comes an increased potential for traders to see bigger wins and losses than they could see if they did not use any margin.
This power is why margin trading can become lucrative yet extremely dangerous when used incorrectly. Lack of experience, unusual market conditions and rare events, could cause a margin account trader to lose everything to their name. But that being said, experienced traders, with good risk control could potentially see quick exponential growth in a margin account.
Margin Accounts and Short-Selling
The reason why many traders open margin accounts with a broker like TradeZero in the first place is to gain access to short-selling, or betting against stocks. Traders need a margin account to short sell because the broker needs to locate or borrow shares, the trader does not own, to ensure delivery on settlement.
In conclusion, margin accounts can be extremely helpful to a trader if utilized properly. The risk associated with margin trading can be dangerous when not used with proper education and risk management.
Mitchell, Cory. “What Is a Margin Account?” Investopedia, Investopedia, 29 June 2022, https://www.investopedia.com/terms/m/marginaccount.asp.
James F. Royal. “Shorting a Stock: What to Know about Short Selling.”
NerdWallet, 29 June 2022, https://www.nerdwallet.com/article/investing/shorting-a-stock.
This content (“Content”) is produced by Josh Jezouit. The Content represents only the views and opinions of Mr. Jezouit. Mr. Jezouit’s trading experiences and accomplishments are unique, and your trading results may vary substantially. TradeZero does not endorse the Content and makes no representations or warranties with respect to the accuracy of the Content or information available through any linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security. Trading securities can involve high risk and potential loss of funds. Mr. Jezouit’s is compensated by TradeZero for producing the Content and may also receive compensation for customers he introduces to TradeZero.
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