Buying on margin is
borrowing money to buy securities. This is done through a
margin account . (By default, all accounts are margin accounts.)
The way we calculate margin is simple. We let you borrow 50% of the value of
long equity positions (regular stock). So, if you had $50,000 of stock,
you could borrow another $25,000. However, the amount you can borrow is offset
by short positions. (We require you to have 150% of the short). Remember,
shorting means you are borrowing a stock and then selling it. The extra 50% is
like having collateral in case the stock moves up and you start losing money.
(More info on short selling is
here).
In other words, the buying power is:
Total Cash + (Total Stocks * 50%) - (Shorted Stock * 150%)
For example, if your portfolio consisted of the following:
$25,000 cash
$50,000 stock
$10,000 shorted stock
Then you'd have a buying power of $35,000:
= $25,000 + ($50,000* 50%) - ($10,000 * 1.50)
= $25,000 + $25,000 - $15,000
= $35,000
Notice how you only have cash of $25,000 but can buy up to $35,000 worth of
securities.
You don't have to worry about doing this calculation. We automatically
calculate it and display the result under the "buying power" column of your
portfolio.
Is this the same as a real brokerage account?
Not exactly. Margin is a more complicated matter in real-life and the amount
you can borrow depends on other factors such as your credit, where you live,
and the different types of securities you are buying.
The important thing about margin is that you are using leverage, which
amplifies your gains or losses. In other words, if your trades are profitable,
then you'll make even better returns. However, if your trades lose money, your
losses are magnified because you still have to pay back the money you've
borrowed.
So, despite the differences in calculation from real-life, the use of margin in
our game gets the main point across about the benefits and risks of using
margin.
|