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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, and anyway you need to learn to trade, 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!

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  • Posted 3 Yrs ago
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