The margin trading sweet spot: A perfect balance between appetite and fear

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People sometimes just have this gut feeling that they should invest in a specific company. Despite funneling all their money into a specific stock, they still want to spend more. So they borrow from brokers instead. Basically, this is what margin trading is all about. According to the law, traders are allowed to borrow as much as 50 percent of the buy value of the stock. It significantly increases the chances for a profit, but the risks will become greater as well.


Image source: investopedia.com

Margin investors are indeed brave souls. They are trading with the concept of borrowing money from the casino so that they could play a few rounds on the blackjack table. Nonetheless, there exists an interest rate sweet spot where they could create a solid case for borrowing other’s people money to spend on stocks. To find it, all a person needs to do is refer to some graphs and a couple of historical data. It states that after-tax market returns of 9 percent will do rather swimmingly for individuals in margin.



Image source: businessnewsdaily.com

That number is derived from the fact that market return over the last 5 years has situated at around 9 percent annually. One could also look at the Federal interest rates which declined to as much as 4 percent. However, this only happened twice between 1965 and 2008. The full effect of recent cuts on the market remains unclear as well. So a person’s best bet comes down to 9. That is of course if volatility is ignored, but corrections will happen. So it is best to tread carefully.



Image source: investopedia.com


At LOM Financial (Bermuda) Limited, advisors are able to build customized portfolios for investors of all risk profiles and investment goals. To know more, visit their official website.

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