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High Octane Investing

In: Managing Your Personal Finance From Start of Career to Retirement and More

Author

Listed:
  • Wai Mun Fong
  • Benedict Koh

Abstract

Dear David,Imagine being able to use other people’s money to make money for yourself! Margin trading makes that possible. Buying on margin means that you get a loan from a stockbroker to buy securities. In these days of lean brokerage commissions, brokers are only too happy to lend you the money. All you need to do is open a margin trading account, sign a couple of forms, place some cash or securities (such as bonds and marginable stocks) as collateral and your broker will lend you at least twice the collateral put up. How you invest the money is all up to you. Sounds like fun, doesn’t it? Well, as in most things, there is no free lunch. In margin trading, you are trading largely on borrowed funds several times of what you put in. In other words, it gives you levered exposure to the market. However, leverage can cut both ways. It can either magnify your gains relative to the amount of money you put in if the market moves in your favour, or it can magnify your losses if the market moves against you. Hence, a margined portfolio is always much more volatile than one without margin.

Suggested Citation

  • Wai Mun Fong & Benedict Koh, 2020. "High Octane Investing," World Scientific Book Chapters, in: Managing Your Personal Finance From Start of Career to Retirement and More, chapter 32, pages 209-212, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811212574_0032
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    More about this item

    Keywords

    Personal Finance; Investment; Managing Money; Retirement planning; College planning; Borrowing; Buying Bonds; Investing in Real Estate; Estate Planning;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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