Why Young People Should Buy Stocks on Margin? What is Margin?
Now two professors at Yale University are suggesting that people in their 20s and early 30s take all their retirement savings and buy stocks on margin. Sounds crazy, isn’t is? Since you don't have money, so the only way to have more exposure to the market is to employ a little leverage. To sum up, what exactly is leverage?
What is Leverage?
Leverage means using capital borrowed from a broker when opening a position. Sometimes traders may wish to apply leverage in order to gain more exposure with minimal equity, as part of their investment strategy. Leverage is applied in multiples of the capital invested by the trader, for example 2x, 5x, or higher, and the broker lends this sum of money to the trader at the fixed ratio. Leverage may be applied to both buy (long) and short (sell) positions. It is important to note that any losses will be multiplied as well as profits.
What is Margin?
A margin is the relative amount needed to carry out a leveraged deal, taking into account spreads, leveraging, and currency conversions. Let’s say you want to invest $1,000 in Apple stock at a leverage ratio of 1:10. The margin will be 10%, meaning you will need to invest $100. If the current stock price for Apple is $136, you will receive the equivalent 7.35 Apple shares.
Which Instruments Can I Apply Leverage To?
Leverage may be applied when trading stocks, currencies, ETFs, commodities and indices, and, in certain circumstances, cryptocurrencies. Each instrument has maximum leverage limitations which are guided by industry regulations.
What Can I Do To Minimise Risk When Trading With Leverage?
While trading with leverage can lead to increased profits on successful trades, it also carries the risk of magnified losses. There are, however, risk-management tools at your disposal to help reduce potential loss.
• Stop Loss: Apply a Stop Loss to close a trade in the event that the market moves a specified amount against your position. You can set your Stop Loss according to a specific level in the market (Rate) OR as a monetary amount, also shown as a percentage of your initial investment, in the trade window.
• Take Profit: Set a Take Profit order to automatically close your position when profit on your trade hits the amount you choose.
• Negative balance protection: On rare occasions in which market conditions cause your Equity to go negative, exchanges will absorb the loss and reset your Equity to zero.
What Are The Fees For Trading With Leverage?
Overnight fees (also called rollover fees) are calculated using unified equations and will appear in the trade popup window before you set your order.
Examples of leverage:
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