Key Differences Between Margin Trading and Operating Leverage

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Do you know when to trade margin versus when to operate leverage? Many traders don’t.

In this video, I explain the key differences between margin and leverage, and how you can use them to your advantage.

Think of margin as taking a loan of shares.

In order to take a negative position, you have to go to your broker and borrow shares on margin, and you pay them back with small interest. When you use margin to short a stock you want to take quick profits, so ideally the margin interest is negligible.

So, when should you use margin? When you short sell stock.

Leverage is when you borrow money — that you don’t have — from your broker. And different brokers offer different amounts of leverage.

So, when do use leverage? I don’t encourage it.

It doesn’t matter how prepared you are or how good your research is — any trade can go wrong or against you. When you take a big position, borrow against your money, and take out loans, you're inviting disaster.

Don't put yourself in that dangerous position!

You can still reach trading goals with a small portion of your account over time. It can be safer and you don't risk disaster.