Trading With Margin

PeakBot functions according to which broker you chose to use to invest with. PeakBot does not hold your money. Instead, we act as a tool that sends buy and sell signals to your brokerage based on the stocks you choose. Due to our relationship with the brokerage companies we must educate you on some standard features that these companies provide to their clients. We are not financial advisors, do not use information we provide as financial advice.

Clearing Trades

Margin has many capabilities and is provided by most brokerages. Traders often use margin to clear trades quickly and efficiently. If your account does not have access to margin you may have to wait as long as 3-5 days for your money to clear from that trade. This massively inhibits an active trading strategy as your money is in limbo when it could be trading. 

The industry standard to access trading with margin is an account value of over $2,000. This means if your account value drops below $2,000 you will not be provided the ability to trade with margin until it is above that threshold once again.

More Purchasing Power 

In addition, trading with margin has another common purpose. Many brokerages use margin to give the user more funds to trade with as well as collect interest from that capital’s use over a particular time. TDAmeritrade provides double the purchasing power that can be used to invest, which is industry standard.

Linked here are the current margin rates for TDAmeritrade.

The following is an example of a position with margin included:

You borrowed $1,000 on margin to buy shares of a stock. The margin rate is 9.5% annually. You held the position for five days, and you had a 2% gain on the position.

  1. Calculate your daily margin payment.
    1. ($1,000 * .095)/360 = $0.26
  2. Calculate total margin owed
    1. $0.26 * 5 days = $1.30 owed in margin interest
  3. Calculate return then subtract margin due
    1. $1000+($1,000 * .02) = $1020 account value without margin
    2. $1020 – $1.30 = $1018.70 adjusted account value. 

In this example you profited $18.70 throughout this trade while using margin.

Margin interest is paid whether or not the position is profitable.

Margin Calls & Maintenance Requirements

You will be notified by your brokerage if margin rates change or for a margin call.

A margin call occurs when the value of the account falls below the broker’s required minimum. This adaptive value is known as the minimum maintenance requirement. This value changes depending on the type of investment that has been made. See this link for specific details on maintenance margin minimums provided by TDAmeritrade. If you purchase a long stock position with a stock price above $4/share then the maintenance requirement will be 30% of the current market value of the stock.

For example:

You have an open margin position with a $1500 current market value. All of the stocks have a price above $4/share. What is your minimum maintenance requirement?

  • $1,500 * 0.3 = $450 minimum maintenance requirement.

In this scenario if the available cash in your account falls below $450 then you would be met with a margin call from TDAmeritrade. 

It is extremely important to make sure you are properly leveraging your account and you are paying attention to your maintenance requirement. Trading with margin increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels.