If you are investing in the stock market, margin trading is a great way to give yourself some leverage. However, in order to do this type of trading you must first be approved. And as with any type of loan, knowing a few tricks of the trade can help you along the way. Here are 5 tips for trading margin successfully.
Tip #1 Know The Interest Rate
Keep in mind this is a loan. And with any loan, there is always an interest rate attached to it. When it comes to stock trading, most online stock brokers will charge right at 8% interest on any funds you have borrowed. The rate you pay will ultimately be determined by the total value of your portfolio. When you understand interest rates, you increase your chances of investment success.
Tip #2 Avoid Buying One Large Order
Generally speaking, depending on the size of your portfolio, it is better to buy over an extended period of time, and not in one large order. Start by taking just half of the position. Once you find a little headway you can add to it. Doing it this way helps you minimize your risks.
Tip #3 Make Sure You Understand The Rules
This is a very important tip. Before you start trading on margin, make sure you take the time to understand the rules. Regular traders can often attain 100% margin on their accounts. However, there are ways you can extend this. If an investor is declared a pattern day trader by the SEC, that investor may be able to borrow more on their account. Always read the broker guidelines before you make a trade.
Tip #4 Use Stop Loss Orders
Margin calls are not a good thing. To help prevent them from occurring, it’s a good idea to use stop loss orders. When you trade with 100% margin, you are basically exposing yourself to both the upside and the downside. A stop loss order can be viewed as a free insurance policy. If you want to avoid bad losses, use them!
Tip #5 Always Stick To Your Game Plan
Warren Buffet is successful because he sticks to his game plan. When it comes to making sound decisions, he sticks to the fundamentals. That’s his personal strategy and it has worked very well for him. As an investor, you should have your own strategy. Most importantly, you should stick with that strategy when making trades and investments.
If you are serious about trading successfully on margin, read The Warren Buffett Way by Robert Hagstrom. In it you will discover some of the methods used by the Oracle of Omaha. If you take the time to learn and understand these methods, they may turn out to be very profitable for you in the long run.