To minimize risks and increase the possibility of realizing gains from margin trading, consider the following:
- Invest Wisely: The rule of thumb here is that one should never invest a sum of money that he cannot afford to lose. Margin trading creates a risk of amplified losses. They should only invest if they have sufficient funds to weather a temporary move against their position and meet a margin call, if necessary.
- Borrow Less Than Allowed Limit: Just because an investor has access to more capital doesn’t mean that he should squander it by investing in every stock on the market. The best thing that the individual can do is to invest small amounts first. With time, he can build up his confidence and gain enough skills to invest in riskier but more rewarding stocks.
- Borrow only for short term: A margin loan is like any other loan. As is the case with a mortgage or a car loan, the margin account holder is required to pay a monthly interest charge. The longer he takes to pay the loan and the larger the sum of money borrowed, the higher the interest expense will be.