To Use or Not To Use Margin

Hey Traders,

I’ve been hearing the same thing from almost everyone I’ve talked to today: “Can you believe this market?”

Well, yes, I can. The market is doing exactly what it’s supposed to do — companies are making more money, reporting bigger earnings, and getting more shareholders involved.

That’s what drives the market higher, right?

But today, I want to talk about something that comes up a lot in these kinds of markets: margin.

What Is Margin and Should You Use It?

Margin allows you to borrow money from your brokerage firm to buy more stock than you could with just your own cash. You only need to put up 50% of the stock’s value, and the brokerage lends you the rest.

Sounds great, right? But here’s the catch: that borrowed money isn’t free. You’ve got to pay interest on it, and that’s where things can get tricky.

If you’re paying 12% interest (annually) on a margin loan but only making 5% on the stock, it’s a losing game.

On the flip side, if you’re making 20% on the stock, that margin can work in your favor.

So as you can see, it’s not just about whether you should use margin — it’s about when and how you should use it. Margin is great if you’ve got a strategy or a stock that’s going to reward you with more than 12% a year. (or whatever the interest rate is at your broker)

That’s when borrowing to invest really pays off. But be careful: if the stock doesn’t perform like you expect, or if it drops, you could end up with a margin call.

That means you’ll need to cough up more money to meet the loan requirements, and that’s when things can get painful.

Sometimes traders have to end up selling other positions just to cover the cash they have to pay back. It can be a real mess if it gets out of hand.

The Bottom Line

Margin can be a powerful tool, but you need to understand the risks.

Use it only when you’re confident in your strategy and when the returns will comfortably cover the cost of the loan.

And remember, margin cuts both ways: While it can amplify your gains, it can also amplify your losses.

So be smart about it — know when and why you’re using it, and don’t be afraid to take advantage of it when the time is right.

Trade well,

Jack Carter

P.S. Last week’s market drop? That was nothing. Despite the recovery we’re seeing, the market still has underlying weaknesses. And I have a plan for how to trade it if and when a recession hits. Here’s my plan.

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