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Will it be risky to get a loan for trading stocks?

Will it be risky to get a loan for trading stocks?

If you want to trade stocks, but you don’t have enough money to pay for them, you may consider taking a loan. Before you rush to the bank with your application (which will probably be denied anyway), you should know that there is an entire sub-specialty of stock trading that is based on loans, which is called margin trading. There are people who specialize in doing nothing but that, and they make a nice profit at the end of the day.

The Basics of Margin Trading

When you buy on margin, you take a loan to pay for the stock. Usually, this loan comes from your broker, though there are other sources of financing available as well. Most brokers will require an initial investment from your side, which is usually 50% of the total value of the account, though it may be more or less, depending on their own internal regulations. For the entire duration while the account remains active, you will be required to maintain a minimum amount – so at some point you may have to add more cash, especially if things don’t go as planned.

You can keep the purchased stock for as long as you want, but, once you sell it, the money will first go towards repaying the loan, and you can only collect any profit left after that. In addition, as with every other type of loan, there will be interest rates to cover, and, needless to say, the longer it takes you to repay your debt, the more interest it will accumulate.

The Risks of Margin Trading

Stock trading is typically a bit risky; taking a loan is never one hundred percent safe, something may still go wrong at any point before you can repay it in full. The combination of the two is, of course, very risky. As a matter of fact, margin trading has often been compared to gambling, and the traders have been likened to professional poker players: you need nerves of steel in order to make a profit and pay up all your debts on time.

Using a loan for trade stocks makes sense only on the short term. The longer you wait, the more expensive the loan will become, and the chances of covering it from the trading profit are slim. That is why the system of lending from the broker was implemented in the first place: otherwise, it’s nearly impossible to get a decent loan with a good interest rate on such as short term, so the options are quite limited.

The importance of researching ever aspect of margin trading cannot be stressed enough. This is a type of deal recommended only for experienced traders, who have already obtained profits from other ventures, and who have the necessary resources to cover any potential failures. The area is heavily regulated by the Securities and Exchange Commission (SEC) and by other financial authorities especially in order to protect new traders, who might feel tempted to bury themselves deep in debt, dreaming on a day when the profits pile up by magic. You must understand these rules and comply with them; failure to do so (for example, by using alternative sources of financing, such as other types of loans, there weren’t meant for stock trading in the first place) can only lead to debts, not profits.

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