5 Tips for Margin Trading Done Right

Margin trading isn’t as mysterious as you think. And it could open up a critical new facet of your investing strategy.

Trading on margin can boost your buying power, using your portfolio assets as collateral. For those looking to take advantage of market opportunities and respond quickly, it's a go-to tactic that can help elevate your portfolio to the next level.

And once an investor gets a handle on how to integrate margin trading into their invest account, they soon discover there are some other benefits to becoming comfortable with margin.

First, it’s important to understand what margin trading offers. Using margin to purchase securities through your brokerage account is effectively like using the current cash or securities already in your account as collateral for a loan. Margin lending allows you to purchase more securities than you could otherwise buy with the balance in your account.

So … what’s the catch? Well, margin trading isn’t without some elevated risk for that additional shot at a higher reward. However, the upside can be sweet for traders who understand how to use margin correctly.

How does margin trading work??

As an example, say you've got $10,000 in your trading account. If you wanted to buy shares of Corporation XYZ currently trading at $100 per share, you could purchase up to 100 shares.

But with margin approval through your brokerage, you could use the $10,000 as collateral to expand your total buying power to $20,000, enabling you to buy up to 200 shares of Corporation XYZ.

If your shares eventually rise to $120 a share, you could sell, repay your $10,000 loan amount and profit $4,000, minus any fees and interest.?

Of course, if your shares ultimately fall to $80 a share, you could also decide to sell, repay the loan and accept a loss of $4,000, not including fees and interest.

Your leveraged total offers the chance at greater returns than you could amass with just your original $10,000. But you could take a loss too.

It's important to note that margin requires an understanding of financial markets, trading strategies, and risk management, which can be intimidating, especially for novice investors. While margin trading isn't for the timid, it does offer opportunities for higher returns. By multiplying your gains faster, you can capitalize on price movements and see higher profits more quickly from your successful trades.

If you decide you’re ready to give margin trading a try, here are five tips you should consider to help protect yourself from making major margin trading mistakes.

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1.????Keep a cash cushion in your investment account.

On a practical level, extra cash in your account can serve as an important buffer to cover potential losses. The size of that cushion may vary from account to account, but the extra resources can also generally lower the likelihood of your broker instituting a margin call if your assets ever lose value.

2.????Prepare for market volatility.

Investors always need to be prepared – but never more so than when they’re working with borrowed money. Take active steps to be as diversified as you can. It’ll help better withstand fluctuations in the overall value of your collateral without falling below the minimum equity requirement.

3.????Believe in your assets.

Again, this may sound like common sense … but evaluate your margin trades like you’re looking only for true blue-chip winners. The securities you buy on margin should at minimum have the potential to earn more than the cost of interest on the loan.

4.????Set a personal trigger point.

We all want big returns. But it’s not worth putting your overall financial well-being in jeopardy to chase them. Establish a sell point that you will absolutely adhere to if a trade doesn’t work out as you’d hoped. Don’t throw good money after bad.

5.????Have extra resources ready.

Remember: every little bit helps. With interest charges posted to your account monthly, you can join a program like Axos Elite to actually lower those interest costs on your margin loan. Utilize those types of benefits as much as possible to truly maximize more of your margin borrowing return.

One more margin trading tip

Don’t be afraid to ask for help. If you have any questions regarding margin trading, you can speak to an Axos Invest Licensed Wealth Advisor.

An Axos Self-Directed?Trading account with margin trading approval can help support your long-term investing strategy. Talk with an Axos Invest Relationship Manager at 888-585-4965 for any questions about Axos Invest or margin trading.

Tracy Gallman?has over 30 years of experience in the financial services industry. Tracy previously served as Senior Vice President with LPL Financial and PFS Investments before joining Axos in 2021 as a Senior Vice President overseeing Axos Invest strategy and product development.

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Views expressed are as of July 30, 2023, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, as applicable, and not necessarily those of?Axos Invest. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Advisory services are offered by Axos Invest, Inc., an investment adviser registered with the Securities and Exchange Commission (“SEC”). For information about our advisory services, please view our Form CRS or our ADV Part 2A Brochure, free of charge. Brokerage services and securities products are offered by Axos Invest LLC, Member FINRA & SIPC. YOU MAY FIND MORE INFORMATION ABOUT OUR FIRM ON FINRA’S BROKERCHECK. View the background of this firm, or REVIEW our Form CRS. All cash and securities held in Axos Invest client accounts are protected by SIPC up to $500,000, with a limit of $250,000 for cash. Read more information about SIPC on the SIPC web page.

Securities and other non-deposit investment products and services are not deposits, obligations of or guaranteed by Axos Bank, are not insured by the FDIC or any governmental agency, and are subject to investment risk including possible loss of the principal invested. Past performance of a security does not guarantee future results or success.

A margin account may not be suitable for all investors. Borrowing on margin and using securities as collateral may involve a high degree of risk. Market conditions can magnify any potential for loss. If the market turns against the investor, he or she may be required to deposit additional securities and/or cash in the account. The securities in the account may be sold to meet the margin call, and the firm can sell the investor’s securities without contacting them. The interest rates charged are determined by the amount borrowed. Please review this additional information provided by the Securities and Exchange Commission prior to enrolling in Margin trading.