MARGIN


Stock market sinks when there's FED Rate hikes.
Why?
Because it hurts stock investors who use margin on their investment as the borrowing rate is more expensive.

Long Term investor's typical yearly target return is between 10-15%.
Higher borrowing rate would definitely hurt the goal.
That is why long term investors would not use the margin on their Long portfolio.

Then what's the benefit of using margin?
1. Day traders have no option but to use the margin to keep the Cash level.
2. Short term traders will have more buying power to boost up their short term investment.

Here's simple math:

You have $10k.
With Margin, your buying power = $10k + $10k = $20k.
Let say you bought GOOG for 1000.
You could bought 20 shares with margin rather than 10 shares.
When stock goes up to 1010 next day which is 1% up.
Your gain is 1% from total buying power but actually 2% gain from your principal.
1 day borrowing is almost nothing in interest as the portion is too tiny...
However if you were going to hold more than a week or a month....
The interest rate would hurt your overall profit.

My system's given me the consistent steady profit YoY or MoM so I never had a challenge of using the margin in my investment.

Margin's for the short term investment and it's very helpful to boost your profit if you use it wisely.


SHORT


This is opposite of LONG.
Haha. Simple, right?

Margin's to borrow the money but Short is to borrow shares from someone.
You think GOOG is going to drop and you want to make money off of it.
How?
You Short the stock.
Here's how it works.

You sell GOOG stock by borrowing someone's share.
So technically you are selling GOOG using somebody else's shares.
Or you could say you are selling for them. hmmm I am not sure if this is right terminology.
Anyway you sold GOOG for 1000 and it's dropped to 980 next day.
You want to take the profit from the short at 1000.
You need to buy to cover the short.
Do you remember that you borrowed the shares from someone?
You need to pay back, right?
That is called buy to cover.
Once you buy GOOG at 980 to cover the short, you book $20 profit per share.
Easy, right?