What if I tell you that you can earn extremely huge profits or returns with a relatively small amount of money? Yes, by buying on margin, this “magic trick” is possible.
Basically, buying on margin works by borrowing money from either your brokerage or bank to purchase certain securities than what you can buy with your current cash. In short, it puts your purchasing power on steroids.
However, as what steroids do, it can put yourself at risks. That is the reason why buying on margin is highly advised to be accomplished by none other than experts themselves.
Despite its high risk or cons, buying on margin is arguably popular among traders and investors. The reason is of course because it works and results in profits for its users.
To know specifically how buying on margin benefits you, here’s some of its advantages.
Also Read: The Danger of Buying Stocks on Margin
Buying on Margin Gives More Returns and Diversification
As we have discussed earlier, the biggest advantage of this kind of purchase is that it acts like steroids. With a small account, you can place trades on stock prices and numbers that you are incapable of buying previously.
By having more money that you can invest in, you can buy even Amazon stocks with a small money on your arsenal. Also, by having more money, you can better diversify your account.
Margin Account Gives More Liquidity
The next benefit of margin is that pertaining to its liquidity. Most brokerage offers margin accounts with faster and easier liquidity.
In other words, those with margin accounts technically do not have to wait to access money as they can borrow money while waiting their trades to finish. Normally, you cannot do that.
The Ability to Purchase Futures
In contrast to other securities such as option contracts that require full cash payment, commodity futures trading are only purchasable using margin.
While this seems to be a specialty that margin accounts offer, in reality it is unlikely to be the case. This is because not everyone suits margin and, if they are unable to do it properly, they will only pose themselves to unnecessary risks.
Also Read: Cash Account vs. Margin Account