What Is Margin Trading, And Should You Try It?

The stock market has come a long way from the days of open pits when buyers and sellers relied solely on facial expressions and hand signals to set prices and trade securities. Advancements in technology and the advent of electronic trading have made it possible for anyone to trade securities and harness some of the strategies that were once reserved for the elite. 

As investing has evolved over the centuries, so too have the possibilities traders have at their fingertips. Margin trading is one of those opportunities. It's a game-changer for savvy investors looking for ways to increase their buying power and potentially amplify returns. With margin trading, the stakes, skill set and thrill are all higher. But so are the risks and potential rewards. 

Surprisingly, even many margin traders lack the key fundamentals of margin trading, according to a white paper published in 2018. Below, we explore some of the basics.

Margin Trading In A Nutshell

It's been said it takes money to make money. But margin trading offers retail investors a different tack – a chance to purchase securities with borrowed funds. It's a tactic implemented by sophisticated traders but is no longer limited only to them. 

Margin trading lets investors buy stocks or exchange-traded funds (ETFs) with a broker's money, borrowed funds referred to as leverage. It's a type of short-term financing that can give you access to more securities fast. However, investors must have skin in the game, too, which is why cash or equities in their accounts serve as collateral for trades.

There are many benefits to using leverage. It allows you to trade in a more purposeful way, bolstering your buying power simultaneously. Purchase more securities and pursue multiple opportunities with freed-up capital. And you won't have to skip market opportunities while waiting to put money to work.

The key thing to remember is that when trading on margin, both your returns and losses are amplified. When successful, margin trading brings higher profits and can take your portfolio to a new level. But if a margin trade goes south, you're on the hook for the loan amount plus interest. 

Additionally, as equity in your account is depleted, brokers could make a margin call. This would require you to add more funds to continue trading and is something to be prepared for.

It's vital to perform your own due diligence on potential trades while also keeping a close eye on the markets. If there are changes to market conditions or the asset, nimbly adjust your strategy before it's too late.

Like most investment strategies, there are both pros and cons to margin trading. These include: 

Pros: 

• Increase buying power with borrowed funds 
• Seize market opportunities that you would otherwise miss out on
• Potentially generate higher profits 

Cons: 

• Risk of losing more than you would in a regular market trade 
• Interest is charged on loans 
• Risk of a margin call 

How To Participate 

To trade on margin, the first thing you'll need is a margin account instead of a standard brokerage account. This account lets a broker lend you money to purchase more securities than you'd be able to do with your balance.

You must be approved for a margin account. Expect to answer questions about your finances, investment experience, risk profile and goals. Next, you must meet a minimum deposit threshold. This amount will influence how much you can borrow from the broker and eventually trade. 

Equities and cash in your account serve as collateral to secure the loan. Brokers also charge interest on the loan that must also be repaid. As a result, you'll want to ensure the anticipated returns will offset any interest that must be paid on the loan.

Axos Invest Makes It Easy and Safe to Borrow

Now that you know how margin trading works, you'll need to choose a platform on which to trade. Look for a trusted partner to help you gain the skills to confidently navigate the markets, like Axos Invest.

Axos Invest has been around since 1999 and was an early mover in the online banking movement. With more than two decades of operating history, Axos has established its staying power, so you won't have to lose sleep about placing your hard-earned money in the wrong hands.

Even if you're new to margin trading, Axos has resources to support and educate you on the path to independent investing so you can make your portfolio work for you. 

Axos makes it easy to borrow against your portfolio assets, with rates as low as 7% and transparent pricing. The more you borrow, the lower your rates will be. As such, you can comfortably borrow more to build your portfolio. 

Opening an Axos Invest margin account opens up a world of possibilities, allowing you to make bigger stock or ETF investments without having to liquidate capital. As a result, you will gain greater market exposure and portfolio diversification while increasing your potential returns. 

Explore Axos Invest's resources so you can borrow, trade and put the power of your portfolio to work. Get started with margin trading today.

Featured photo by sergeitokmakov on Poxabay.

This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.