Purchasing Stock on Margin, Why Take 2-1 Leverage When You Can Get 200-1?

Purchasing Stock on Margin, Why Take 2-1 Leverage When You Can Get 200-1?

Purchasing stock on margin was very shared before the arrival of options trading but now the market for leveraged trading is done chiefly in the forex and treasury bill markets where the leverage ratios are considerably higher and the transaction costs are small relative to the average size of trades made.

instead of purchasing stock on margin, the great majority of day traders opt to take their transactions into the options market. There are limitations in this market but the ability to increase buying strength (levering up) with the use of an option trade is so much more efficient and less risky (you can only lose what you put in) that it has become the investment means of choice for high flying equities day traders. A associate of factors make buying options preferable to purchasing stock on margin:

  • Option trades require less monitoring
  • Margin trades have harsh limits on leverage
  • Margin trades require initial collateral
  • Margin trades accrue interest expense on overnight locaiongs
  • Margin accounts can be revoked and liquidated at any time

Needless to say margin accounts are much more high maintenance and don’t typically offer any sort of meaningful return on investment advantage to similar option trades.

Unlike purchasing stock on margin, these days retail traders are increasingly trading on margin in forex leverage accounts. These accounts offer very high leverage ratios with low transaction costs and thin spreads. The high quantity of trading activity makes for an extremely liquid market. These traits (thin spread, no commissions, and high leverage) have made forex trading very popular in the United States and in other places amongst retail investors who were denied access to these markets before because of capital restrictions.

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