| Description: | Investing in stocks on margin is one of the reasons why many people believe trading is gambling – it’s an inherently speculative type of trading in which the chances of losing money are similar to the chances of earning money.
You can earn a lot of money and have the usual thrill we only feel on first dates, but you can also lose a lot of money and have the usual sadness that appears in a long-term relationship break-up.
For example, let’s imagine you have £5,000 in your brokerage account and you’re interested in buying a £10,000 share.
You don’t have this kind of money right now, but you see an opportunity for profit, and you’re an aggressive and experienced trader. You risk borrowing extra £5,000 from the broker.
Now you’ve entered the mystic realm of margin trading, where anything can happen.
Let’s think of 2 scenarios:
1 – Good news. The stock price is up and running, now you can sell it for £11,000! That means you are getting your initial £5,000 back, you’ll pay the broker the £5,000 you borrowed + the super-low interest.
In this case, your profit will be of almost £1,000! Way to go.
2 – Bad news. The stock price fell drastically, and you could only sell it for £9,000. In this case, you’ll still need to pay the £5,000 to the broker + interest, which means you’ll only get back 4,000.
Be aware that you can lose more money than you invested in the first place. In the example, there is also a possible scenario where the total stock price falls from £10,000 to £1,000, for example.
If that happens, you won’t only be able to get your original investment of £5,000 – you’ll also not be able to pay back the borrowed £5,000! |
