A friend of mine suggested using Questrade for opening a Margin Account. I understand that a Margin account is an account for managing investments, but I am not sure how it differs from other kind of accounts. Can someone explain what a Margin account is and how it works? Thanks!
Margin trading will amplify your wins, but it can also increase your losses. You want to have a good understanding of margin trading before you invest because it can keep you on the straight and narrow path and avoid the pitfalls. In comparison, a cash account only uses the money that you invested without borrowing anything. Cash accounts have an advantage with long positions because you never feel forced to sell. In some cases, you may need to sell with a margin account at a less-than-favorable position. Be aware as well of how doing margin creates a debt that you will need to repay. The firm will charge a daily interest rate that you want to be aware of.
On a margin account, you must maintain a certain margin ratio at all times. The account value must remain above that amount, or the client will issue a margin call. Whenever a margin call happens, you must bring the account back to a value within the threshold. To do this, you can either add money, or you can sell some of your holdings. You should understand how margin accounts differ from cash accounts. Beginner investors may want to start with a cash account and try margin as they grow in understanding. Consider stocks that have a relatively stable price to prevent the value from dipping below the margin.
You should understand how margin does come with its own set of risks. A more conservative investor may want to stick with a cash account and aim for an eight percent annual return. Even that amount can add up over the years. If the investment doesn’t go as planned on margin, you can end up paying much more than you expected.
Margin will always have an appeal to investors who want to increase their gains. Especially when you only have a nominal amount of cash to work with, margin allows investors to see incredible gains in the stock market. As the saying goes, “It takes money to make money.” A margin account is worth considering when you know how to make money in the stock market.