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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