Category Archives: Stock Market

Buying on Margin: What Is Buying on Margin?

In this post today, What Is Buying on Margin will be explained to you in a very easy and better way, so let’s start.

There are two approaches to earning money from the stock market. The first is known as investing, and the second is trading. While both ways are meant to make money from the stock market, there are also some great differences between trading and investing.

One of such differences in trading and investing is requiring capital. By the sentence, we are certainly not intending to say that you don’t need any capital to trade in the stock market, but the need for capital and its amount is comparatively very low than what is required for investing.

Whenever we do trading in the stock market, it is not always necessary to have the proper amount of funds required to purchase any stock. Often, it is seen that traders do trade in the stock market with much capital, which they don’t even have.

So how do they get the capital? What is it? Whether you, as a normal trader, can get the capital? Whether Is it legal or not?

Understanding the Stock Market In Extremely Simple Words –

Now, let’s first understand The primary concepts of stock margin. We’re going to answer 3 common questions about Stock margin from which you can learn the very basics of the stock margin.

What Stock Margin Is?

In extremely simple words, the stock margin is the money of others.

What Buying on Stock Margin Is?

Purchasing any stock using the stock margin simply indicates that the particular stock has been purchased by borrowing someone’s money.

Who is the person who will lend you the money?

In all general cases, it is none but your broker who will lend you the money to buy stocks using stock margin. The idea of stock margin may sound great, but it is not that easy. To understand it deeply, keep reading the post till the end. To start with, We have to know the differences between a normal stock account, also known as a cash account, and a margin account.

Whenever you opt for making a new account at the platform of any online stockbroker, there appear 2 types of accounts to select from. The first one is what everyone chooses – a cash account, and the second one is the special one – a margin account.

A Cash Account

The first one is you really simple – a cash account. A cash account is just like any savings bank account where you can use all the money you have kept in your bank account anytime & anywhere. You will be allowed to use only the money you have already kept in your account, and the bank will not lend you any money for that matter.

So if you have $10000 in your bank account, you will be allowed to use the maximum amount of $10,000 (if there aren’t any certain restrictions.). In cash-account also, if you have a balance of $1000, you will be allowed to trade stocks or funds of just $ 1000.

Before talking about a margin account, we should know the reasons.

Why Would You Need a Margin Account?

Everybody enters the stock market with the hope of earning money. The chances of earning money are directly proportional to the amount of capital you have to trade. That’s where the concept of leverage comes off. In simple words, from the stock market view, leverage is just the expedition of your funds.

With a margin account, as you are getting more funds than what you actually have, you are certainly getting the opportunity to increase the amount of want you currently have using your broker’s money.

Margin Account

Unlike the cash account, a margin account is a type of account that allows the traders to trade using the broker’s capital. We use a simple matrix to see the effectiveness of any margin account. It is just the ratio of funds employed versus the amount of funds your broker lets you trade.

Let’sLet’s assume that to be 2:1. You will get 2x funds of what you have put in your margin account in this certain condition. If you do have $ 100 in your margin account, your broker will lend you another $ 100, and altogether you will get $200 to trade instead of $100.

And for your information, the $200 amount is now your buying power. The higher the antecedent of the ratio is, the more money you will get to trade.

Generally, the ratio, which is also called the margin rate, is not that low in the case of the stock market. It tends to remain between 5% to even 12% in some cases. But in the case of Forex, the scenario totally changes, and this ratio becomes 25:1 or even 50:1, which means that for every $1 in your trading account, you can trade the amount of $ 50.

So while using any broker, you can see the documentation about margins from where you can get an overall idea about what margin rates they are offering.

Short Selling – One of The Best Benefits of Having a Margin Account

We generally buy stocks first and then sell them off when the stock price reaches high. But if you, with your technical analysis is, predict that the stock price of a certain stock is going to be down in the upcoming days, there is a feature in the stock market called short selling with which you can sell the stock at a much higher price.

And when the price of the stock goes down, you can purchase them again. This widget is called short selling, which allows you to sell stocks before purchasing them. With a margin account, you can do short selling.

What Is a Margin Call?

A margin call is another disadvantage of having a margin account. One of these is a sudden call/notice from your broker. The notice is given on the side of your broker when the value of your investment in certain areas has undergone the threshold of the marginal value of your broker.

In this case, you have to add some money to your broker’s margin account again. If you don’t do that within a certain time and credit limit, your broker may sell some of the stocks which are declining by their price really fast and violating the rules.

Risk of having a margin account:

Buying on Margin: What Is Buying on Margin?

  1. While there are endless advantages of having a merchant account that has certain disadvantages too of having it.
  2. There are certain charges for having a margin account. in most cases, the annual maintenance charge of a margin account is greater than that of a cash account.
  3. Most of the popular brokerage firms will only permit you a margin account when you have a big amount of money in your brokerage wallet.

A margin account lets you trade in stocks or other services like Forex with 3x, 5x, 10x amounts of funds you have. In general, it may seem that this feature is allowing you to increase your wealth by 3x, 5x, 10x. But if there are fluctuations

that disobey your prediction about the stock price, you may even face the loss instead of making any profit. That’s why it becomes really risky to trade with high margin rates, especially if you are a beginner and starting with very low capital.

I explain simply, trading with a margin account lets your earn 3x or 5x time more than what you were supposed to earn without a margin account but it also increases the chances of losing money by 3x or 5x times.

Margin Account or Cash Account, Which is Good For Me?

Whenever you open an account in any brokerage firm, they will ask you to select the account type you will need. A margin account or a simple cash account. Now the question is – which between those accounts is good for you?

The simple answer to this question is that if you are an investor And planning to invest your money in a particular stock for at least 6 months, you don’t need to open a margin account. But if you are a trader and willing to deal in the derivatives market, you should opt for a margin account.

Conclusion

So this was our article on margin account and buying stocks on margin. In this article, we have tried our best to use simple and Call upon the words for readers to understand the topic clearly. We want more readers to understand each and every topic of Finance in an extensively simple way – so that everyone can trade or invest in the stock market with the hope to grow their wealth.

How To Take Advantage Of A Stock Market Crash

In this post I am going to tell you How To Take Advantage Of A Stock Market Crash, So let’s start without delay.

The stock market is volatile. As long as the exchanges are open, every good stock price fluctuates, and the fluctuation is normal as there are demands and supplies in the market at different price ranges. But there are some unpredictable and unwanted situations where the stock price fluctuates only downwards. 

The stock market crash is one of the nightmares to people connected to the stock market, be it investors or traders. That’s why no true investors would ever wish for a stock market crash. It is an unpredictable situation where the overall value of your portfolio decreases from about 5% to even 20%. Investors and traders lost their hard-earned money due to a stock market crash. 

But there are still some tactics and tricks, which, if followed, the stock market crash would not be a nightmare anymore for you. In the following post, we will learn how to take advantage of a stock market crash and discuss how you can make the most of it. 

  • Do Nothing, just chill
  • Buy Golds – during a market crash
  • Buy stocks – after the market crash ends
  • Buy dividend-paying stocks before or during the crash
  • Invest in foreign stocks
  • Trade with caution

Do Nothing, just chill: 

It might sound like a foolish suggestion, but it is not actually – we would like to advise you that this advice will only be beneficial if you are a long-term investor. You may have heard several times that long-term investors are those who stay focused on their portfolios in spite of short or long market corrections. Indeed, long-term investors only pick the good and quality stocks in which they have their utmost belief. 

That’s why if you are a long-term investor, you shouldn’t worry even a bit about market fluctuations or collection. Usually, the time span of a market correction is about one or even two months in the worst cases.

But history has proved repeatedly that there happens a bull run after any big stock market correction. And that’s the time when the stock price again climbs up and almost reaches the place where it was before the market crash. So, according to the advice of so many ace investors, being a long-term investor, you shouldn’t worry about a common market correction. 

But if you are not among the people who want to sit back and relax while the market is crashing, you should definitely check the following ways which tell what to do during a stock market correction. 

Buy Golds – during stock market crash:

It is said that the stock market and the value of gold are inversely proportional. This means that when the stock market rises, the value of gold falls. It is definitely because as the stock market rises, it means that the country’s economy is growing well, and that’s the reason why the price of gold decreases. 

So during a grand stock market crash, investors suggest that you invest in gold. And rather than purchasing physical gold, we recommend you buy digital gold, which requires comparatively lower time and lower expense charges. 

If you don’t want to buy any form of gold like physical gold or Digital gold, you can also invest in Gold Bond and gold ETF, which is a way easier process of investing in gold than the previous two.

But it would not be wise to invest in gold during a stock market correction with a long-term vision. The reason is that after a mega-correction in the stock market, the market usually climbs up, and thus, the value of gold decreases. You can buy gold during the start and sell it when you assume that the market will rise again. 

Buy stocks – after the stock market crash ends

We discussed that when a market crash happens generally, a bull run follows every major market crash. The same applies to one of the biggest ever market crashes in the history of the crash, which all of us probably have witnessed, the Covid 19 crash. In that crash, the S&P index fell from 3400 to almost 2150 – 2200. 

The fall took to happen just one month which is surely not a huge time for investors to realize the grand market crash. Still, it took about four months for the market to reach the previous level. That said, investors get a sufficient amount of time to buy stocks after a market crash. 

Not only investors but all kinds of traders take advantage of the market fall and try to buy stocks at the lowest possible price. So after a big stock market crash, you should invest in more companies to get a big short-term gain in a very small amount of the market is getting ready to bounce back again or has already started to bounce back time. 

Buy dividend-paying stocks before or during a stock market crash

Stock market investors make money from the stock market in two ways. The first one is known to everybody directly from the stock by purchasing the stocks at a comparatively lower price and selling it at a higher price. 

And the second one though it’s also very popular – earning from dividends. During a stock market crash, the first one is unlikely to earn anything for you and, instead of giving a positive return, this will pay negative returns.

But, during a market crash, the most effective way to earn money from stocks without short selling is to buy dividend stocks. Recently, there was no major reason behind the small crash in the market, but still, the market fell down.

In these circumstances, the companies were not in the losses, and when this situation happens, companies keep paying the dividends as usual.  But, certain things need to be considered before choosing any company just for dividends. 

Things to consider before choosing any dividend-paying company

As the discussion had proceeded earlier, only fundamentally strong stocks survive during any market crash/correction. That’s why before choosing stock for heavy dividends, one must see whether the company is fundamentally strong or not. 

The second thing is that while choosing any dividend-paying stock, one should definitely check the past dividend-paying record of the company. If the company has constantly been paying its shareholders a good amount of dividends, you can surely go for the stock, but if the company is inconsistent in paying dividends, it is advised not to rely on those companies for dividends in the bear market.

In this context, you can also take the help of some measuring indexes like – dividend yield. If the dividend yield of any stock is about 3 to 5%, we recommend you choose the company. 

Invest in foreign stocks

We can classify stock market crashes into two segments – the first one is a country paste crash where the stocks of a certain country go down due to any glitch or any changes in the policy of the government or any other internal matter, And the other one is the global crash as we had seen before the covid-19 pandemic has started.

So we can conclude by saying that if the stock market of a certain country’s crisis is likely to happen, all other countries’ stock markets will eventually crash. Taking this opportunity, investors can invest money in foreign stocks with the hope of getting at least some positive returns instead of losing money in our own country’s stocks. 

Trade with caution

A market crash is probably one of the most volatile times in the market when every stock price goes too low from the top high and vice versa within just a few hours. That’s a warning sign for traders, and in these kinds of situations, the risk of taking trades increases.

It’s likely that due to any significant announcement about the company, the company’s stock price may not meet the trader’s expectations/targets. Let’s think about one situation, where an intraday trader with amazing technical analysis predicted that the stock price of a certain company would climb $200 and set a target accordingly, but a major announcement caused the share price to go down except for the $200 level. 

That’s why it becomes risky to trade during market corrections. And this caution is very much applicable to ace investors or traders who are planning for their retirement because just one bad luck can make your hard-earned money go in vain. It is especially advised not to trade in the derivative segment unless you are a professional trader. 

Conclusion

In this article, we have tried to discuss how to take advantage of a stock market crash and possible things that you should follow when a stock market crash occurs. We have been attempting to include steps to follow as a trader and the steps to follow as an investor.

Again, we emphasize that you should not get scared by small market corrections if you want to be a real investor. Follow the advice, and we hope that these can help you reduce your losses to a great extent during any stock market crash.