There have been umpteen opinions on how margin trading can make or break people’s trading careers. While for some traders (typically with deep pockets), margin trading is a way of life, trading on margin has also been suicidal for many an amateur trader. The China stock market crash was the latest example of what over-leveraged margin trading can lead to – what with “grandmas, cab drivers, college kids using mobile apps for margin trading”!

As far as our US markets are concerned, a quick look through most brokers’ margin account rates reveals that everyone offers lending rate slabs basis the size of account you hold with them. No surprisingly, if you have more than a million Dollars in the account you get the lowest rates and if you are a very small investor (>$10k in the account) then you must pay quite a high fee. Now, at one level this feels just about right. One might argue that small investors should, typically, be deterred from trading on margin since it can be risky and the demand of high fees should, ideally, act as such a deterrent. Large investors, as one would imagine, have much less to lose and therefore it is right for brokerages to “let them” borrow cheaply.

While this sounds patently logical, the logic ignores the possibility that a small investor/trader could actually be a better/smarter trader than the larger one. In many ways. Strategy, returns, timing et al. It is widely believed that small traders ordinarily just follow large ones but that’s really just a half-truth. A large number of small traders don’t blindly follow the big boys. Bottomline, if you are a better trader with, say, higher percentage returns over a reasonable period of time then you are more likely to return the margin amount successfully. Of course, then you’re likely to borrow again for your next trade.

Shouldn’t you, therefore, be encouraged with an attractive lending rate?

A big question coming-up here will be – are brokerages capable of accurately judging how “good” a trader someone is? Let’s look at this in another blog post. Till then, do let us know what you think about this one!

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At Stockal, we love to watch how markets respond to unique events and how our users (investors - you and old) can make the best use of circumstances to make smart investments. In Thoughts@Stockal, we do deep and broad analysis of such impactful trends and events.

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