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Commodities Margin Trading - What Should I Know About Trading Commodities on Margin?

Aug 17, 2007
Perhaps you have heard the term margins before, but you don't have a very clear idea of what this means. Margins are when you borrow money, usually from a broker, to buy stock. In addition to borrowing, you use your investments as collateral. The more you make on your investments, the bigger the better and therefore the bigger your profits. This can be a risk to you, but it can also be a great benefit.

You must understand a few things about margins before you begin however. Normally if you buy a stock in cash, you will have to pay the full amount and you may only earn a fifty percent return. When you use this type of commodity, you can earn a hundred percent earn, yet you will have to pay back the original loan plus interest. This can work in the opposite way however if the stock loses any value. This is the main reason that these commodity types pose quite a risk, but also why so many are willing to take that risk.

There are a few things that you should keep in mind when it comes to margin commodities and the risks they pose. If you keep these things in mind than you should be all right. The first thing to keep in mind is that you may lose more money than you have actually invested. Once in a while you may be required to put money in the account, without very much notice, in order to cover any losses. Another thing to keep in mind is that you may have to sell some or all of the stocks in order to reduce your securities. One last thing is that some brokerage firms may sell off your securities to cover the loan you took on the margins, without letting you know. Just remember in the end, you can save yourself a lot of trouble if you really know the agreement ahead of time. Be sure you thoroughly read the terms before signing anything, especially when it comes to margins.

Other than the agreement, when it comes to margins you should know the basics rules. The Federal Reserve Board and organizations like the NYSE have certain rules in place. Independent brokerage firms can have their own, but they must measure up to the other organizations previously mentioned. Let's take a closer look at some of these rules on margins.

There is a minimum when it comes to margins. The minimum is usually two thousand dollars or a hundred percent of the price, whichever comes out to the lesser amount. There are those brokers who may require more, upwards of two thousand dollars or even more. Be sure you get the best deal. Another thing to keep in mind is the term initial margin. This term is usually used in reference to the amount that you are allowed to borrow or use for margins. Regulation T in the Federal Reserve Board's rules says you can borrow up to fifty percent of the purchase price, but some places may require more than that. Either way these are what are known as initial margins.

One last thing to look at when it comes to margins is the term maintenance margin. This is when the broker or firm you went through requires a minimum amount of equity in the stock, usually enough to cover what you borrowed. The baseline is around twenty-five percent, but some places can charge up to thirty or even forty percent.

These are something that should be considered when you are looking for someone to go to. As you can see there is some fair amount of risk. But at the same time margins can give you great benefits as well. In the end it is up to you whether the risks are outweighed by the benefits of the situation. Now that you understand these a lot better, you may be better able to decide if they are right for you.
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