Understanding Investing With Margin

The Perils of Investing With Margin

The Perils of Investing With MarginThe demand for robust returns in the capital markets environment has created an environment where investors require capital to enhance their returns.  This demand has generated a sophisticated process in which investors can borrow capital that is used to invest in stocks and futures to enhance their returns. Investing with margin is a way that investors can find a great rate of return.

Most brokers offer investing with margin as a product which allows investors to borrow capital using the securities they hold within their account as collateral.  Margin provides leverage, which can enhance and detract from returns.

What Is Investing With Margin

Margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counter party.  Investing with margin is most often associated with a broker or an exchange. The collateral that can be used to post margin can be in the form of cash or securities, and it is deposited in a margin account.

The initial margin is a guarantee and offsets losses should they occurs. Margin is calculated by using the historical volatility of a financial security and calculating the potential losses that could occur on a given day. The margin system is a mechanism that insures there is sufficient cash to cover losses and protects a broker from risks of losses.

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Why You Need To Practice Contrarian Investing

warren-buffettContrarian investing is an investment strategy that goes against popular convention. A contrarian investor buys or sells stocks or investments when other investors are doing the opposite.

Contrarian investing is an excellent investment strategy to help you find great stocks at a good value that are out of favor with the general public.

I’m a contrarian investor. And, I think you should be one too!

Famous Contrarian Investors

Contrarian investing is best illustrated by looking at some famous, successful individuals. Warren Buffett is a great example of what a person can achieve if he or she believes in buying when most people are selling and vice versa. Buffett himself has long held that the best advice he can give to any investor is to be patient.

Warren Buffett is famous for saying, “Be fearful when others are greedy, and greedy when others are fearful.” Tweet This!

Patience Is Key To Contrarian Investing

Patience pays off for many contrarian investors. For instance, if an investor buys shares in a company at a very high price when other investors are selling and making a quick profit in the short term, the contrarian knows to hold on the shares.
If the contrarian investor holds on to the shares for another for a long period of time, three or five years for example, that high price will most likely rise.

Of course, all situations are different. In essence, this investor has made much more in terms of ROI or return on investment than his or her counterparts by being patient, thinking in the long term, and being willing to wait for market corrections.

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