Be Careful Using Margin

February 5, 2010

Please tread softly when you buy stocks on margin.

It was Earl Wilson who said that "Nowadays people can be divided into three classes-the haves, the have-nots, and the have-not-paid-for-what-they-haves."

That's unfortunately true of many speculators in the markets, and when it happens it can have devastating effects.

It can be tempting to buy stocks on margin-after all, it can increase your leverage enormously, so you can potentially rake in much bigger profits with the money you invest.

But margin can also increase your risk enormously, which is exactly why it's so dangerous unless it's used very judiciously.

In a nutshell, remember that you shouldn't be trading at all unless it's with money you can afford to lose, and when you trade with margin you not only stand to lose your money, but your equity positions as well.

The nastiest part about it is that the losses can come very rapidly, and sometimes even without your knowledge.

If you're using margin now-or even if you're just thinking about it-make sure you're completely informed about the rules and the risks involved.

A good place to start is with the FinancialCyclesWeekly article on "Margin Basics for Astro-Traders". You'll find it at http://www.financialcyclesweekly.com/public/785.cfm .