So we're gon na be diving into what exactly is margin in day trading, the pros and cons of using a margin account and, of course, how to properly use it to grow. Your trading account before we start. Please remember to drop a like to sign up for a free subscription of bad jokes seriously, though, be careful what you wish for. So here's the difference between what it means to day trade with a margin account versus cash account.

Let's say we have a five thousand dollars: small cash account, which is what most conventional investment accounts are to day trade. Let's say i want to buy tesla stock right now at 340 dollars. Normally, if i'm buying with a cash account of five thousand dollars, i could only buy 14 shares of tesla stock and if i sell my shares at 360 dollars and make 20 dollars a share, i'm 14 shares that's 280 dollars worth of profit from a cash 5. 000 account that's not bad right now.

What if i'm trading the same 5 000 capital with a margin account trading on a margin, account allows you to borrow funds from your broker, hence increasing your buying power in order to purchase more shares than if you were just using your own five thousand dollars in Capital, so, instead of just my cash buying power, i could use up to twenty thousand dollars of buying power if i use margin. So in this example, if i intend to buy tesla stock here at 340 dollars and sell it for a quick bounce, i could buy double the amount of shares of tesla than if i were using a cash account. Since my broker allows me four to one leverage. So if i do the same thing and sell my tesla stock for a bounce of 20 points, then i made 20 dollars a share on 30 shares.

That's 600 in return only using my own 5 000 of capital. Again, this is just an example. You definitely don't want to use all of your twenty thousand dollars of buying power, and this is the biggest pro of trading on a margin account by using this leverage. Properly margin accounts allow you to amplify your potential returns, but at the same time, your potential risk is definitely going to be higher as well, which is very important and we're going to be going over that in just a little bit when you're using margin, you're borrowing Money from your broker to finance part of your trade, most brokers will give you three to one four to one or sometimes even six, to one worth of buying power.

So, with the same five thousand dollars capital, i could get up to fifteen thousand twenty thousand or even thirty thousand dollars worth of buying power. Now that's the leverage when you're trading a margin intraday, but when you're holding positions overnight, your buying power drops to two to one. So the maximum amount in this example will be ten thousand dollars worth of buying power overnight. The leveraged buying power is definitely the first pro of trading a margin.

Now, the second pro of trading on a margin account is the trade settlement period. If you're using a cash account to day trade. The amount of capital you put into your trade positions will take two days before it comes back into your trading account. So in our example earlier on the tesla trade, if i bought 14 shares of tesla and made 280 dollars of profit, i would have to wait.

Two trading days for that cash, five thousand and forty dollars to return to my account in order to use it to trade again, four thousand seven hundred sixty dollars was my original capital. I used to buy 14 shares of tesla and 280 dollars was my profit from the trade, so in other words, after that tesla trade is closed out. I would only have 240 dollars left in my cash account for the next two days. I essentially can't trade anymore until that cash settles.

It's very important that you actually wait two days. Trust me, you don't want to experience any cash settlement violations and risk your broker, locking your account for 90 days. This is the same as violating the pdt rule, but, on the other hand, with a margin account, you do not have to wait for the cash to settle in for two days before reusing the capital again, and this my friend is extremely beneficial, especially if you want To trade full time as a day trader, there's always different opportunities in a stock market every single day. I don't want to have to wait two days to day trade again.

So in our example earlier once i closed out of my tesla loan position, while the profits of 600 will not come in until the next trading day, i could reuse my original five thousand dollars of capital and then the same twenty thousand dollars of buying power in The same day now, the third pro of using a margin account. I know you're going like hold up there, humble trader, there's more. This is this is way too much yeah i kept the best for last, and this is none other than the ability to short sell, with a margin account. Even if you don't need that extra leverage in buying power - or you don't care about the cash settlement period, because you're already a baller having the ability to short sell, just opens so much more opportunities to profit in a stock market.

Whether the market is going to the moon or crashing to the ground, a margin account allows you to short, sell and profit from the falling stock prices. When you're shorting you're, essentially borrowing shares of a stock from your broker to sell, and then you buy them back later on, hopefully at a much lower price and you profit from a difference and you cannot short sell with a cash account and that my friends is What it means to day trade with a margin account, i see you're getting interested, but you know me: i'm not going to give you all the rainbows and sunshines and lambos without explaining to you the potential downside of trading with margin accounts, and why am i saying This trading a margin comes with higher risks than using cash accounts since you're, not only trading with your own money, you're, also trading with your broker's capital. If you start gambling with your entire buying power chasing the height of the day breakout and following chat room alert, not only do you risk your original five thousand dollars of capital, you could also owe your broker a lot of money. Okay, this is serious talk here and i'm kind of like sweating, because she just got really hot, whether you are a new trader or not.

The risk of trading a margin is extremely important to understand. If you're using a margin account, you must be aware of the margin, maintenance margin. Maintenance is the amount of capital you need in order to keep all your trading positions open. For example, if a trader borrowed from the broker's money to buy 30 shares of tesla at 340 dollars like our example earlier, he or she would need to borrow an additional thousand two hundred dollars on top of their original five thousand dollars of capital.

So the total value of this position is now ten thousand two hundred dollars and the margin maintenance in this case will be around fifty percent, because around half of the capital used here belongs to the trader and if this broker has a margin maintenance of 30 percent, This stock position is perfectly fine right now. This trader is good, we're good. Now, god forbid. On that same day, elon musk is bored out of his mind in the office, or he decides to smoke a little bit, something something and he decides to tweet on his phone.

Tesla stock is too high right now imo and after he sends out that tweet tesla stock drops to 240 dollars. That means the value of this traders. Long position in tesla stock is now only worth 7 200, but remember this trader borrowed 5 200. Earlier from the broker, since he used margin to purchase this tesla stock position, this is where the trader will be trading in very dangerous waters.

Get it because if you take the valuation of the tesla loan position, which is now down to 7 200 minus the original amount he loaned from the broker the 5 200, the amount that actually belongs to the trader is now only two thousand dollars. Now that little amount remaining is now only worth twenty seven point: seven, seven percent of margin, maintenance and remember what we talked about earlier. The margin maintenance is thirty percent for this account, and since the current valuation in the tesla stock is down from ten thousand two hundred dollars to seven thousand two hundred dollars, the trader must keep at least twenty one hundred sixty dollars in the trading account. In order to keep it above thirty percent, otherwise he run the risk of his broker, liquidating his entire account and close out his tesla position.

For him the moment your margin maintenance drops very close to or below the minimum. This is when you'll get a very important phone call. No, it's not a guy with a girl calling you to tell you how much they miss you. I mean i wouldn't know what that's like.

No, this is even worse. The mic bag holder contacting me again. This is what we call a margin call. A margin call is not an actual phone call nowadays, maybe it used to be, but even the brokers nowadays are too lazy to pick up the phone and dial.

No, it's an email or a text alert sent from your broker straight to your cell phone, demanding that you fund additional capital. So your position keeps above the 30 percent maintenance to respond to the margin call in this case. The trader in our example, could number one either fund at these additional 160 dollars to account to stay above 30 margin. Maintenance option number two sell parts of the stock position for a loss, but this equity that's released would reduce the amount of money that he is borrowing from the broker.

If the trader does not respond to option 1 or 2 quickly, then the broker may liquidate the entire position for him. Without further notifications, margin calls and liquidation ensures that the broker will get the original five thousand and two hundred dollars of loan back. I mean they got ta, protect it right, so they want to make sure their own money is safe and maybe some of the traders too, maybe just just maybe so, if the traders tesla loan position in our example gets liquidated at 240 dollars. That means the trader.

Would take a loss of a hundred dollars a share thanks to elon musk's tweets on 30 shares. That's a realized three thousand dollars loss. Basically, this is a sixty percent haircut on the original five thousand dollars of margin account, just like i mentioned earlier, while using margin gives you four to one or greater leverage buying power. It also increases your risk and that's why i have some trading tips for you.

If you decide to use a margin, account number one: do not over leverage be smart, just because you have that much buying power doesn't mean you need to use it. For example, if i have fifty thousand dollars in my trading account right now. That means i have up to two hundred thousand dollars worth of buying power. Just because i have the buying power doesn't mean i'm going to use it, and especially if you're new to trading and your capital in a margin account is only 5 000.

Then you should only trade with that 5 000. So for that example, you should only buy up to 14 shares of tesla. You could definitely keep the margin account, so you get the ability to short sell and have the funds settled in your account. Within the same day, but please be smart just because you could use a buying power doesn't mean you should number two and it's very important, follow your stops, the trader in our example.

Earlier his name was mike bagholder. He didn't follow his stop. A proper trading plan should include an entry profit target and, most importantly, a stop, so you can prevent one losing position from blowing up your entire account. Like we talked about now back to the original question from the beginning, should you day trade with a margin account? Well i'll tell you this right now: margin accounts are extremely beneficial for professional, full-time day traders who use them to maximize profits, both on the loan side and the short side when used correctly and accordingly, you can leverage your buying power and take advantage of the market Volatility, but when used incorrectly or if the trader disregard risk management, he or she could lose the entire trading account due to a margin call again, your trading account type, whether it's cash or margin, it's just a tool of doing business in day trading by itself.

It's not going to determine your success, nor failure, there's a lot of misconceptions online about margin. It carries a bad rep, because a lot of people say it's gambling or it'll, be the reason you blow up all my accounts i use to day. Trade are margin, accounts and it's the same way for most full-time day traders. I know, let me reassure you margin by itself.

It's not the reason. Traders fail or blow up it's the trader's own lack of risk management with a lack of discipline and for many people. It's a fact that they rely on chat, room alerts, that's doing the damage and truth be told. A reckless trader can blow up either margin or cash accounts, so this is definitely not limited to margin.

My friends, let me know whether you're day trading with a cash or margin account in the comment section below. Thank you guys so much for watching. As always and the humble trader and i'll see you guys next week, hey guys thanks for watching. I hope you enjoyed the video and the bad jokes if you want to see more day trading content, make sure to subscribe and follow me on twitter and instagram for more.

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