1: margin definition
2: how margin works
3: margin vs leverage
4: example of margin
Opening information:
Margins are the borderline of something or some matters. The borderline is the end line of protection in certain activities.
When there is no margin the particular item limits couldn’t be measured at any place or location.
This article contains information about what is a margin in the stock market, how margin works, and what is the difference between the margin and leverage, and finally the example of margin.
1: margin definition
The entrepreneur Mr. John has a technology business that Produces unique cloud space freely for the consumer and is also a manufacturer of WiFi systems.
John is the chief executive officer where worked very hard for the last 8 years for the industry.
The industry is a publicly traded company, where 40 percent of the company is owned by John, and the other 60 percent of the company is owned by general public Investors.
John had no coverage for his risk 40% net worth of 150 million dollars. After two years, the net worth of his technology shares is 250 million dollars.
Lack of technology updates with competition, the John industries start to lose the shares price over time. John didn’t have any advantages over their competition.
This made his company stocks down again and again without any rise in the share price. John industries lose 80% of their value over time.
Investors who hold the John Industries shares lose the value of their investment money too.
John still holds his shares, he didn’t sell a single share of the 40% of his holding.
After 1 year of the 80 percent loss in the value of John Industries, it lost the full value of its shares, which came to zero, and the Industry went into bankruptcy.
If John sold his total shares before the 2 years, his shares would be worth $250 million. now the same shares are worth zero.
For this reason, John didn’t have any single margin amount or final amount to sell his all shares on the market even though he knew that the Industry was going to be ruined over time.
That is where margin came from, where the margin is not only important for stock but also for each business matter. So now let’s dive into how the margin works in the stock market.
And how it helps investors to protect themselves from loss.
2: how margin works
The margin is an end line or end price for investors, where it protects its Investor’s money from the hard and dangerous loss of any type of investment in the whole stock market.
This margin also would be called a stop loss. It doesn’t matter whether you invest or make money in investments. Each matter of position had some margin in the investment of stock, bonds, derivatives, commodities, currencies, crypto extra….
Say the margin is not set, it’s created after the investment, once the margin is created you could able to change the margin based on the risk the Investor is willing to take.
When the price of the stock or bonds reaches the stop margin line amount, the Investment amount would be cut in loss and save the investor money from the whole loss of the Investments.
On the other hand, the margin is also used to Target the profit amount in the investment. When the price of the Securities rises over time and reaches the target margin, the investment profits are taken into account suddenly.
Third the margin is made while at the entry point of the investment, which the margin helps to understand the up and down side of the whole investment.
Therefore when the security price is above the entry margin, the amount is raised above the investment amount and when the price falls below the entry margin, the amount falls below the investment.
People of stock Investors are confused about the margin and leverage, let’s now dig into the key difference.
3: margin vs leverage
Margin is a borderline for any securities in the stock market. But leverage is the one which made the one Initial amount to multiple amounts of time to increase the profits on the trade.
Margin and leverage are not the same, leverage is used in the margin trades, and without margin, leverage is not used in any investment.
So the key difference between the leverage and margin, margin is Investment with any of the borderline. Leverage is the investment based on multiple amounts of the initial amount. To make you more clear about the margin let’s dive into one example.
4: example of margin
Say Mr. Madison is a stock Investor.
When he bought the 100 Apple shares for $147 which is worth 14,700 dollars. Now the margin of the investment is zero.
Madison set the stop loss at $56 after the purchase of the 100 Apple shares.
Now the margin of the investment is 56, so he didn’t have the chance to lose his entire investment amount.
Market rule: #100103
Margin is a market rule because without margin it is impossible to place and make a trade in any kind of stock. Not illustrating the profit or loss margin, demonstrating the entry margin as a margin that is necessary and is unavailable.
If your investors and not comfortable or align investing with based on market rules please learn about how to regulate your investments under your control with the use of Rule investing.