The fine print of trading and investing
Column · Argument
Read margin the way the agreement writes it: a loan charged interest daily, from a lender allowed to sell your shares.
The trading screen shows margin as buying power. The agreement you signed describes margin as a loan, secured by your shares and charged interest every day. Read it the second way.
4 min read · All columns →
Losses cost more to repair than they cost to take, so set a maximum drawdown and cut size well before the hole gets deep.
Add to a winner only after the stop has moved, so the whole position risks no more than the first lot did, and only on a fresh setup.
Keep several months of expenses in cash-like savings before investing, because the fund is what stops a lost job from forcing a sale at the low.
Size every trade from the account and the stop, and treat conviction as a reason to take the trade, never as a reason to make it bigger.
For a defined holding period a deep in-the-money call caps the loss and may cost less than a margin loan; for open-ended holding, shares win.
A margin loan is money your broker lends against the stocks in your account, charged interest every day and repaid whenever you choose, until a fall in prices makes the choice for you. Before borrowing, compare a margin loan with a personal loan, plan your margin loan repayment, look up the stock margin requirements your broker applies to each holding, and run the account through a stock margin analyzer to see how far prices can fall before a call.
Myth check
Treating Dividend Stocks as Bond Substitutes Breaks in a Bad YearDividend stocks are for income that grows over time; money for fixed needs belongs in bonds or cash, because a dividend can be cut in the year you need it.
Ledger
Buying Dividend Stocks on Margin Turns Yield Into a Spread TradeBorrowing to buy dividend stocks only adds income when the yield beats your loan rate; below that, it cuts income and adds a margin call.
Argument
Every Short Sale Is a Margin Trade, Whether It Feels Like One or NotSize every short from its margin call price, and plan as if the price has no ceiling, because it does not.
Beginner · about 50 min
Borrowed Money Has Teeth: Margin Accounts, Interest and Margin CallsInvestors about to switch on margin, or already borrowing, who want to know what the loan costs and where the margin call sits.
Beginner · about 48 min
Nobody Rebuilds From Zero: Risk Rules That Protect Trading CapitalTraders who pick entries carefully but size positions by feel, and want written rules for how much to risk and when to cut back.
Beginner · about 52 min
Ten-Q Very Much: Reading Earnings Reports and Financial StatementsTraders and investors who read the earnings headline and want to read the financial statements underneath it.
Intermediate · about 47 min
Hands Off the Buy Button: Filtering Weak Setups and When to Sit OutActive traders who take too many trades and want a written filter that says no before the order goes in.
Whether you can tell a breakout that holds from a bull trap, using the close, volume, higher time frames and the story behind the move.
Whether you can trace an earnings beat to its source: the business, the share count, the tax line, adjustments, one-time items or cash that never arrived.
Whether you can compare trade plans by reward-to-risk, place a stop where the idea fails, size from ATR and check a target against resistance.
Whether you can work out the gain needed to recover a loss, follow a string of returns in dollars and see what leverage and averages do to the result.
Whether you can check a swing setup's trend, location, reward-to-risk, event risk and size before you take it, and pass when one check fails.
Whether you can separate a headline from the surprise inside it, and link economic releases, Fed decisions and company news to the price move.
Whether you can find the flaw in a written trading plan: stops, size, total open risk, sector bunching, targets, event dates and risk per trade.
Whether you can place a stop where the trade idea is proven wrong, by price, close, news or time, and keep it above the margin call price.
Whether you can manage an open swing trade by the numbers: when to add, trim, trail, exit on time or news, and when to leave it alone.
Whether you can grade a trade on its process instead of its outcome, measure results in R and tell a real record from a short run of luck.
Whether you can work out what a fall does to margin equity, where the call price sits, what the loan costs and how much to sell to meet a call.
Whether you know which facts sit off the chart, from the earnings date and share count to borrow, liquidity and your broker's margin rules.
The share price that triggers a margin call on a long or short position, from your loan and the maintenance requirement.
Interest on a margin loan by the day, the month and the holding period, and the return a trade needs to cover it.
Your leverage ratio from equity and position value, and what a given market move does to your equity.
The gain needed to get back to even after a loss, and the balance after a run of losing and winning trades.
Shares from your account risk and stop, the reward in R, and the loss if the stock opens past the stop.
Break-even price, maximum loss and profit at a target for a bought or sold call or put.
Gross, operating and net margin from an income statement, and earnings per share from the share count.
Yearly dividend income and yield on cost, and what is left after margin interest when the shares are bought with a loan.
Margin loans, maintenance requirements, margin calls, interest and what leverage does to a losing trade.
Position size, stops, drawdown limits and the arithmetic of getting back to even.
Adding to winners, IPOs, short sales, borrow costs and the setups worth passing on.
Trades held for days to weeks: ranges, targets, overnight risk and how many to run at once.
Break-even prices, naked puts, spreads, and options used as a substitute for a margin loan.
Funded accounts, drawdown floors and trading an evaluation at the size you would keep.
Income stocks on margin, dividend cuts, return of capital and payments in lieu.
Operating margin, operating leverage, adjusted earnings and reading a report past the headline.
Rates, recessions, stagflation, fiscal and monetary policy, and the margin debt the market carries.
Margin of safety, cash reserves, capital losses, tax rates and the line between investing and trading.
