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Author: MQTrader Jesse   |   Latest post: Fri, 1 Nov 2019, 4:13 PM

 

MQ Trader - Should we use margin to buy stocks?

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Margin account allows investors to leverage their position in the investment. Leverage is known to have the ability in trading a large position with only a small fraction of trading capital efficiently. With proper risk management, leverage can juice investors’ purchasing power to boost the return on investment.

There is a number of scenarios which investors can utilize margin to magnify their profit from stock investment:

  1. The share price does not meet expected price within the settlement days of collateral accounts. To know more, please visit MQ Trader – Getting Started with Margin
  2. The returns generated by cash upfront trading account is lower than expectation.
  3. Buying stocks with expected returns/dividend yield which is higher than the interest rate of margin.

Boost Equity Return

Margin can help to multiple the returns from the investment especially when the stock market is experiencing valuation contraction which can contribute to low returns for the stock market in a long term. The returns of margin trading can be even more attractive when the cost of interest is lower than the returns from the investment.

For dividend investors, margin borrowing can be a good idea to magnify the dividend yield. The returns can be significantly higher especially strong fundamental companies with dividend yield higher than the interest rate of the margin account are invested.

We can compare the return generated with and without leverage by using the example below:

Example:

Investor A has only RM 30,000 to invest and he has a portfolio of shares with 8% of returns/dividend annually. The chart below shows how the return vary over 10 years when leverage is used.

 

Assumption:

  1. The interest rate of margin account is 5%.
  2. The return/dividend remains the same over the years.
  3. Maximum leverage is used (2 x cash).

Based on the chart above, the returns grow in greater extent over the time when leveraged trading account is used. The profit of leveraged trading account over 10 years is RM 1799.11 higher than the non-leveraged trading account’s.

Open Margin Account

With proper risk management techniques, margin can significantly enhance your investment strategy to maximize the profit margin from your investment.

To Begin investing utilizing margin:

  • STEP 1: Make sure you understand the risks and benefits of using margin.
  • STEP 2: Have at least RM 30,000 of assets.
  • STEP 3: Sign up for a margin account
  • STEP 4: Start enjoying the benefits and flexibility offered by a margin account.

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We would like to develop this system based on community feedback to cater for community needs. Thanks to all those who have provided valuable feedback to us. Keep those feedbacks coming in!

Disclaimer

This article does not represent a BUY or SELL recommendation on the stock covered. Traders and Investors are encouraged to do their own analysis on stocks instead of blindly following any Trading calls raised by various parties in the Internet. We may or may not hold position in the stock covered, or initiate new position in the stock within the next 7 days.

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