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Margin trading gives traders greater exposure to price changes, increasing risk and potential returns. The benefits of trading on margin vs non margin trade is in leveraging your trading power. Your trading capacity is dramatically increased for comparatively little initial cost – magnifying and intensifying performance. Your broker will try to close your open position as fast as possible using whatever prices are available at that time in the market. You will miss the opportunity for your trades to bounce back.
Ally Invest has a minimum maintenance level of 30 percent, but some firms have a threshold as high as 40 percent. It’s also worth noting that a brokerage may increase its account maintenance margin requirement at any point without notice. If this happens, you might need to deposit more money into your account. Or you’ll be issued a margin call and some (or all) of your holdings could be sold. The risks and drawbacks should be carefully considered before trading on margin.
On the same note, if the value of the securities posted as collateral also increase, you may be able to further utilize leverage as your collateral basis has increased. Once the account is opened and operational, you can borrow up to 50% of the purchase price of a stock. This portion of the purchase price that you deposit is known as the initial margin. It’s essential to know that you don’t have to margin all the way up to 50%. Be aware that some brokerages require you to deposit more than 50% of the purchase price. • Borrow less than the maximum amount allowed, and consider setting your own personal maintenance level, above which you won’t borrow.
Margin Trading involves significantly higher risk than investing with cash. If the trade goes badly against you, you could even end up losing even more than you initially invested outright. And even if the trade goes your way, interest charges on the money you borrow can eat into your profits. You can’t fully trade on margin inside an IRA as these are considered cash accounts. Some brokers, however, will allow clients to apply for “limited margin,” which allows them to buy securities with unsettled cash. But keep in mind that margin trading amplifies losses just as it does for profits.
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