Investors like yourself probably have an idea of what margin equity is, but are unsure of its real-world application. You may be looking for instruction on how to calculate margin equity and what some of the advantages associated with margin investing are. This post will provide you with a quick lesson on margin equity and possible advantages to margin investing for investors like you.
What Is Margin Equity?
Margin is the name given to money that is borrowed to make investments. Equity is defined as holdings such as stocks or other investments. Therefore, margin equity is the amount of money you have made after costs associated with margin investments have been taken out. When you borrow money to make investments, you are still able to make money on those investments. You will, however, have to pay these loans back. Margin equity is simply the amount of money, either cash or holdings, you have after you have subtracted the amount you owe your brokerage firm.
How Do I Calculate Margin Equity?
Calculating margin equity is not as simple as knowing one specific formula. There are two types of margin equity: long and short. Depending upon which type of margin equity you are trying to calculate, you will use a different formula. However, calculating margin equity is not something you will have to worry about when investing on margin. That is a job for your broker. Your job is to be able to understand the percentage of equity a firm requires you to have in order to continue investing. Hopefully, you will not need to worry about this. As long as your holdings are performing well, you will never have to wonder if you are meeting that percentage of equity.
Advantages To Margin Investing
Margin investing can be a tempting proposition. As it should be. Margin investing provides you the advantage of larger buying power. That larger buying power can lead to increased gains for you, the investor. However, margin investing also comes along with an increased risk. Of course, you are investing borrowed money. However, as you become a seasoned investor, the potential gains may outweigh the risks. This larger buying power can also contribute to better asset allocation. More buying power provides a chance at better diversification for your portfolio. These factors may not be considerable advantages for a novice investor. However, if as you gain more experience in the market, you may want to consider the prospect a little closer.
Margin equity should not be of concern to you unless you are interested in possible margin investing. If you choose to invest on margin, you will be increasing both your gains and your losses. That means there is much more risk associated with this type of investing. If you are just beginning to get a handle on regular cash trading, margin investing is probably not yet right for you. So thankfully you have no need to worry about having a grasp on margin equity right away. However, as you become a seasoned investor looking to diversify your portfolio and increase possible gains, margin investing may be right for you. Make sure to take note of specific margin equity requirements for the firm you plan on borrowing from. Margin investing can be risky, but the rewards may be worth it in the end.
Image from https://www.mtimarkets.com/accounts/leverage-margin