Page 75 - THE MARKET WHISPERER

THE MARKET WHISPERER 73

SMART Online brokers collect rebates for execution, therefore
MONEY profit more if they delay execution and route orders to
destinations that are cheaper for the broker.

Should You Trade on Margin?

A margin is a loan that brokers provide to traders. As with every loan,

margin bears interest, unless the trader makes use of it only during the

course of the trading day, in which case no interest is paid.

When a client opens an account with a broker, the client can choose a
margin account or a cash account. A margin account allows you to buy

stocks at a multiple of four times your money: for example, if you deposited
$30,000 in your account, you will be able to buy intraday (in one day’s
trading) stocks valued at $120,000. In other words, the margin carries a
4:1 ratio.

By contrast, if you want to hold stocks overnight, perhaps fearing that
the stock price may change in the course of two days’ trading, you will
need to be satisfied with a 2:1 margin. This sets your buying power at
$60,000. If you use this doubled buying power between two trading days,
you will be charged interest. Clearly it is worthwhile using the intraday
margin during one trading day, as you will pay no interest. I support using

margin beyond one day of trading, despite the interest charged, because

the trading method that holds for several days is based on aggressive profit

goals of several percent, which means the annual interest charged allows a

higher expected profit. Margin allows you to work with higher sums than

your regular cash balances allow.

SMART Margins are dangerous if you don’t know how to use them,
MONEY but a real gift when you manage them correctly.

Margin also has its disadvantages. Let’s say you deposited $10,000 in
your account and bought 1000 shares at $10 each, using all your deposit.

In other words, you’ve used your own deposit without using any margin.
A drop of 25% in a stock price from $10 to $7.5 will cause you a loss of
$2500, or 25% of your money. On the other hand, if you use a 4:1 margin,
buying 4000 shares for $40,000 followed by a drop of 25% in price will
cause $10,000 worth of damage and wipe out your account! And what
would have happened if you’d slept on Lehman Bros stocks after the Sub-
Prime Crisis when they plummeted to $3 and the next day were worth