Pattaya September/October 2021

MARKETS – TRADING ON MARGIN
in theory buy not just 10 shares
of Apple but instead you could
buy 100 shares!
You would be borrowing
$13,500 and paying only your
$1,500 to make up the difference.
If the share price goes up
to $165 then you would be sitting
on $3,000 of equity, and
your initial stake of $1,500 dollars
would have doubled.
All is well and good if the
stock price goes up but what if
the price falls?
If the stock price falls
from the initial $150 down to
$145, you will have lost $500,
because you are holding 100
shares, instead of just 10.
With a margin trade you
have to be able to take the
steeper losses along with the
higher potential profits.
If the price drops to $135
per share then you will have
lost your entire $1,500 and at
the same time the broker will
ask you for an urgent margin
payment. This request is known
as a margin call.
You could elect to pay
more money in to keep the
trade running but may endure
more losses if the price drops
further.
If you don’t have any more
money then the shares will be
liquidated immediately to cover
the loan amount. In this case
$13,500 was borrowed and the
100 shares are now only worth
$135 each so you will be able
to repay the loan but you will
entirely lose your $1,500 stake
that you had at the outset and
will be left with nothing.
Margin calls, or rather the
forced liquidations of share
holdings when people can’t
make their margin payments is
one reason why you see stocks
fall far and fast. Many of the
worlds largest trading houses
use leverage and it is a point of
contention with central banks
since it can lead to a house of
cards collapsing very quickly
as people are forced out of
their trades.
As a retail trader, margin
trading should be approached
with caution. If using margin,
it might be better to take the
first option and still purchase
a smaller number of shares so
as to keep money in the bank,
instead of betting the house on
what may turn out to be a shortlived
investment.