Examples

The following are examples for both a gain on a margin trade and a loss.

When a Gain Occurs

1. You have a margin account of $30,000.
2. You see a stock that you want to buy but need to use a margin. Specifically, you want to get 100 shares of a stock trading at $150. You would have to spend $15,000 on the trade. You can always use part of your $30,000 for a margin trade.
3. You will have to spend $7,500 on the initial trade and the other $7,500 will be on margin. The margin would have an interest rate of 7.5%. Again, the interest rate varies based on the broker and how much you have put into your margin account.
4. The stock increases to $190 in value when you choose to sell the trade. That $15,000 investment is now $19,000 in value.
5. You must repay the $7,500 margin alongside the interest on the loan. The interest would be $562.50 in this example.
6. You will have made a profit of $3,437.50 from this trade. The profit is based on how your original $7,500 increased to $9,500 in value. The interest would be removed from the trade. In the end, you will have realized a significant profit.

This particularly illustrates how you could have a greater profit from a successful trade when you work with a margin. A trade like this without margin would have been just 50 shares of stock. The $7,500 you invest would become $9,500. You would have earned $2,000 from this trade, but that is much less than what you would have realized if you had used a margin trade with more shares involved. This is why so many people love margin trading. They love that it is a practice that gives them a greater chance of a greater profit than using only their own money.

When a Loss Occurs

You obviously need to get a margin trade to succeed to make a profit. The losses that might occur from a margin trade if the stock does not increase in value.

1. You paid for 100 shares of a stock at $200 with $10,000 coming from your own account and the other $10,000 from a margin loan. This would also include a 7.5% interest rate.
2. The stock goes down to $150 before you sell the shares.
3. When you sell the shares, you will realize only $15,000.
4. You must repay the $10,000 margin loan plus the $750 interest charge.
5. This results in a loss of $4,250.

Now let’s say that you went with a straightforward cash transaction where you got 50 shares without using a margin for the 100 share purchase. You will invest $10,000 in the stock and then sell it at $7,500 for a loss of $2,500. The potential for you to lose money could be even worse if you spent more money on your margin trade. Even more importantly, the damage would be even worse if the stock falls further.