What is the best and most optimal way to use margin
This essentially depends on how you prefer to measure your performance. I will just give a few simple examples to start. Let me know if you're looking for something more. If you just want to achieve maximum $ return, then you should always use maximum margin, so long as your expected return (%) is higher than your cost to borrow. For example, suppose you can use margin to double your investment, and the cost to borrow is 7%. If you're investing in some security that expects to return 10%, then your annual return on an account opened with $100 is: (2 * $100 * 10% - $100 * 7%) / $100 = 13% So, you see the expected return, amount of leverage, and cost to borrow will all factor in to your return. Suppose you want to also account for the additional risk you're incurring. Then you could use the Sharpe Ratio. For example, suppose the same security has volatility of 20%, and the risk free rate is 5%. Then the Sharpe Ratio without leverage is: (10% - 5%) / 20% = 0.25 The Sharpe Ratio using maximum margin is then: (13% - 5%) / (2 * 20%) = 0.2, where the 13% comes from the above formula. So on a risk-adjusted basis, it's better not to utilize margin in this particular example.
A CFD broker will let you open a trade on margin as long as your account balance is more than the margin required on all your open trades. If the required margin increases within a certain percentage of your account balance, you will get a margin call. If you then don't deposit more funds or close losing trades out, the broker will close all your trades. Note: Your account balance is the remaining funds you have left to open new trades with. I always use stop loss orders with all my open trades, and because of this my broker reduces the amount of margin required on each trade. This allows me to have more open trades at the one time without increasing my funds. Effects of a Losing Trade on Margin Say I have an account balance of $2,000 and open a long trade in a share CFD of 1,000 CFDs with a share price of $10 and margin of 10%. The face value of the shares would be $10,000, but my initial margin would be $1,000 (10% of $10,000).  If I don't place a stop loss and the price falls to $9, I would have lost $1,000 and my remaining margin would now be $900 (10% of $9,000). So I would have $100 balance remaining in my account. I would probably receive a margin call to deposit more funds in or close out my trade. If I don't respond the broker will close out my position before my balance gets to $0. If instead I placed a stop loss at say $9.50, my initial margin might be reduced to $500. As the price drops to $9.60 I would have lost $400 and my remaining margin would now only be $100, with my account balance at $1,500. When the price drops to $9.50 I will get stopped out, my trade will be closed and I would have lost $500, with my account balance still at $1,500. Effects of a Winning Trade on Margin Say I have the same account balance as before and open the same trade but this time the price moves up. If I don't place a stop loss and the price goes up to $11, I would have made a $1,000 profit and my remaining margin will now be $1,100 (10% of $11,000). So my account balance would now be $2,000 + $1,000 - $1,100 = $1,900. If I had placed a stop loss at say $9.50 again and the price moves up to $10.50, I would have made a profit of $500 and my margin would now be $1,000. My account balance would be $2,000 + $500 - $1,000 = $1,500. However, if after the price went up to $10.50 I also moved my stop loss up to $10, then I would have $500 profit and only $500 margin. So my balance in this case would be $2,000 + $500 - $500 = $2,000. So by using stop losses as part of your risk management you can reduce the margin used from your balance which will allow you to open more trades without any extra funds deposited into your account. Hedge what risk?  What is your risk exposure?  I don't seem to understand what is your risk factor (is it a basket of metals), if its a non market product you can do the following:  1. Calculate correlation matrix between your basket and potential candidates (mining, etf's etc)  2. Sell the strongest correlation, however be careful as you are not only selling the rare earth prices but also the extraction margin and market risk.  3. Ideally you would find a futures contract or create some way to isolate the rare earths while cancelling out the margins (will be tough!). "For anyone who'd like to know a little more:  Basically, I'm curious about ""newer"" styles of portfolio optimization. We all know and love the classic Markowitz Mean-Variance optimization model. Gather your assets, optimize weights based on minimizing variance and maximizing return, plot your capital allocation line, find your Sharpe Ratio portfolio.  [(In case anyone doesn't know what I'm talking about, check this out, it is a very common technique still used quite widely today)](http://www.investopedia.com/terms/e/efficientfrontier.asp)  However, the Markowitz model makes a couple of huge assumptions, one of them being that asset returns roughly follow a normal distribution. Since this is not always the case, new models for risk management and optimization have emerged, starting with Value at Risk, and more recently, [Conditional Value at Risk (CVaR).](http://www.investopedia.com/terms/c/conditional_value_at_risk.asp)  You can also draw an efficient frontier for CVaR portfolios [using fairly complicated linear programming techniques, as first outlined in this very influential paper.](http://www.ise.ufl.edu/uryasev/files/2011/11/CVaR1_JOR.pdf) Fortunately, these days, the techniques are widely available in Python and Matlab packages.   For further discussion, what are your thoughts on the Markowitz model? Do you have a preferred portfolio optimization method?" There are 2 approaches. One of them is already mentioned by @Afforess. If the approach by @Afforess is not feasible, and you can not see yourself making an unbiased decision, close the position.  By closing the position you will not get the best price. But by removing a distraction you will reduce amount of mistakes you make in the other stocks. The initial margin is $5940 and maintenance margin $5400.  A simple search of Comex Gold Margin gives the CME group site. You then need to specify CMX metals to see the margins.  Gold is currently about $1300. A gold future is 100 oz. So the full contract is worth $130K. You want to 'go long' so you enter into a contract for Dec '14. You put up $5940, and if gold rises, you gain $100 for each $1 it goes up. Likewise on the downside. If gold drops $5.40, you lost $540 and will get a call to end the position or to put up more money. It's similar to stock margin requirements, only the numbers are much lower, your leverage with futures is over 20 to 1. My thoughts from the top:  1. If you're already long, which not just buy-write? if you want to sit on the portfolio for some time with little rebalancing collecting some option premiums might not be bad?  2. You can replicate this portfolio on a rolling basis through bull spreads, which should hedge (or at least reduce) your theta and give you some of that sweet sweet convexity, however you will need a large enough size to cover your transaction costs.  3. I agree with maximizing mean / lower semi var (most kids max mean/var)) so good move there. However you need estimates of expected return (not easy!) and semi var (easier). Look into using GARCH (or a form of it) on the semi var for a better estimator.  4. Is this an MSR portfolio? How do you determine your weights?  5. In terms of sizing/leverage,  Remember the betting condition that equity needs to be positive for all time. How are you planning to limit your max DD? and how often do you plan on rebalancing/rebetting. Short selling can be a good strategy to hedge, but you have almost unlimited downside.  If a stock price skyrockets, you may be forced to cover your short by the brokerage before you want to or put up more capital. A smarter strategy to hedge, that limits your potential downside is to buy puts if you think the market is going down.  Your downside is limited to the total amount that you purchased the put for and no more. Another way to hedge is to SELL calls that are covered because you own the shares the calls refer to.  You might do this if you thought your stock was going to go down but you didn't want to sell your shares right now.  That way the only downside if the price goes up is you give up your shares at a predetermined price and you miss out on the upside, but your downside is now diminished by the premium you were paid for the option. (You'd still lose money if the shares went down since you still own them, but you got paid the option premium so that helps offset that). "Kid, you need to start thinking in thresholds. There are several monetary thresholds that separate your class from a more well funded class. 1) You cannot use margin with less than $2000 dollars Brokers require that you have at least $2000 before they will lend to you 2) In 2010, Congress banned under 21 year olds from getting access to credit. UNLESS they get cosigned. This means that even if you have $2000, no broker will give you margin unless you have a (good) credit history already. There was a good reason for this, but its based on the assumption that everyone is stupid, not the assumption that some people are objective thinkers. 3) The brokers that will open an account for you have high commissions. The commissions are so high that it will destroy any capital gains you may make with your $1000. For the most part. 4) The pattern day trader rule. You cannot employ sophisticated risk management while being subject to the pattern day trader rule. It basically limits you from trading 3 times a day (its more complicated than that read it yourself) if you have less than $25,000 in one account. 5) Non-trade or stock related investments: Buy municipal or treasury bonds. They will give you more than a savings account would, and municipals are tax free. This isn't exactly what I would call liquid though - ie. if you wanted to access your money to invest in something else on a whim. 6) What are you studying? If its anything technical then you might get a good idea that you could risk your money on to create value. But I would stick to high growth stocks before blowing your $1000 on an idea. Thats not exactly what I would call ""access to capital"". 7) Arbitrage. Lets say you know a friend that buys the trendy collectors shoes at discount and sells them for a profit. He might do this with one $200 pair of tennis shoes, and then use the $60 profit different to go buy video games for himself. If he wanted to scale up, he couldn't because he never has more than $200 to play with. In comparison, you could do 5 pairs ($200 x 5) and immediately have a larger operation than him, making a larger profit ($60 x 5 = $300, now you have $1300 and could do it again with 6 pairs to make an even great er profit) not because you are better or worked at it, but solely because you have more capital to start with. Keep an eye out for arbitrage opportunities, usually there is a good reason they exist if you notice it: the market is too small and illiquid to scale up with, or the entire market will be saturated the next day. (Efficient Market Theory, learn about it) 8) Take everything I just taught you, and make a ""small investor newsletter"" website with subscribers. Online sites have low overhead costs." A long straddle using equity would be more akin to buying a triple leveraged ETF and an inverse triple leveraged ETF, only because one side will approach zero while the other can theoretically increase to infinity, in a short time span before time decay hits in. The reason your analogy fails is because the delta is 1.0 on both sides of your trade. At the money options, a necessary requirement for a straddle, have a delta of .5 There is an options strategy that uses in the money calls and puts with a delta closer to 1.0 to create an in the money strangle. I'm not sure if it is more similar to your strategy, an analogous options strategy would be better than yours as it would not share the potential for a margin call. From Vanguard's Best practices for portfolio rebalancing: "Margin trades let you post a margin of a certain proportion of the value of the trade as collateral against the price of a trade and pay off the difference between the current price and the price that you bought at. Any losses incurred are taken from the margin so the margin has to be maintained as prices change. In practice this means that when the price moves significantly from the buying price a ""margin call"" is triggered and the buyer has to increase their posted margin. The vast majority of the foreign exchange trades done every day are margin trades as (effectively) are all spread bets. Margins get reset overnight whether or not a call has occurred." The major drawback to borrowing to invest (i.e. using leverage) is that your return on investment must be high enough to overcome the cost of finance. The average return on the S&P 500 is about 9.8% (from CNBC) a typical unsecured personal loan will have an interest rate of around 18-36% APR (from NerdWallet). This means that on average you will be paying more interest than you are receiving in returns so are losing money on the margin investment. Sometimes the S&P falls and over those periods you would be paying out interest having lost money so will have a negative return! You may have better credit and so be able to get a lower rate but I don't know your loan terms currently. Secured loans, such as remortgaging your house, will have lower costs but come with more life changing risks. The above assumes that you are getting financing by directly borrowing money, however, it is also possible to trade on margin. This is where you post a proportion of the value that you wish to trade with as collateral against a loan to buy the security. This form of finance is normally used by day traders and other short term holders of stocks. Although the financing costs here are low (I am not charged an interest rate on intraday margin trading) there are very high costs if you exceed the term of the loan. An example is that I am charged a fee if I hold a position overnight and my profits and losses are crystallised at that time. If I am in a losing position at that time the crystallisation process and fee can result in not having enough margin to recover the position and the loss of a potentially profit making position. Additionally if the amount of collateral cash (margin) posted is insufficient to cover the expected losses as calculated by your broker they will initiate a margin call asking for more collateral money. If you do not (or cannot) post this extra margin your losing position will be cashed out and you will take as a loss the total loss at that time. Since the market can change very rapidly, such as in a flash crash, this can result in your losing more money than you had in the first place. As this is essentially a loan you can be bankrupted by this. Overall using leverage to invest magnifies your potential profits but it also magnifies your potential losses. In many cases this magnification could be sufficient to lose you more money than you had originally invested. In addition to magnification you need to consider the cost of finance and that your return over the course of the loan needs to be higher than your cost of finance as well as inflation and other opportunity costs of capital. The S&P 500 is a relatively low volatility market in general so is unlikely to return losses in any given period that will mean that leverage of 1.25 times will take you into losses beyond your own capital investment but it is not impossible. The low level of risk automatically means that your returns are lower and so your cost of capital is likely to be a large proportion of your returns and your returns may not completely cover the cost of capital even when you are making money. The key thing if you are going to trade or invest on leverage is to understand the terms and costs of your leverage and discount them from any returns that you receive before declaring to yourself that you are profitable. It is even more important than usual to know how your positions are doing and whether you are covering your cost of capital when using leverage. It is also very important to know the terms of your leverage in detail, especially what will happen when and if your credit runs out for whatever reason be it the end of the financing period (the length of the loan) or your leverage ratio gets too high. You should also be aware of the costs of closing out the loan early should you need to do so and how to factor that into your investing decisions. Good question. There are plenty of investors who think they can simply rely on intuition, and although luck is always present it is not enough to construct a proper portfolio. First of all there are two basic types of portfolio management: Passive and Active. The majority of abnormal gains are made with active portfolio management although passive managers are less likely to suffer loses.  Both types must be created with some kind of qualitative and quantitative research, but an active portfolio requires constant adjustments (Market Timing) to preserve the desired levels of risk and return.  The topic is extremely broad and every manager has his own preferred methods of quantitative analysis. I will try to list here some most common, in my opinion, ways of stock-picking and portfolio management. Roy's Criterion: The best portfolio is that with the lowest probability that the return will be below a specified level.  This is achieved by maximising the number of standard deviations between the return on the portfolio and minimum specified level: Max k = (Rp-Rl)/Sp Where (Rp) - return on portfolio, (Rl) - specified minimum return, (Sp) - standard deviation of portfolio return. Kataoka's Criterion: Maximise the minimum return (Rl) subject to constraint that the chance of a return below (Rl) is less than or equal to a specified value (a). Maximise (Rl) Subject to Prob (Rp < Rl) =< a For example, assume that the specified value is 20% - this will be met provided (Rl) is at least 0.84 standard deviations below (Rp). Therefore the best portfolio is the one that maximises (Rl) where: Rl = Rp-0.84*Sp Telser's Criterion: Maximise expected return subject to the constraint that the chance of a return below the specified minimum is less than or equal to some specified minimum (a) Maximise (Rp) subject to Prob (Rp < Rl) =< a Assuming same data as previously:  Rl =< Rp-0.84*Sp and select the portfolio with highest expected return. Security Selection Now let's look at some methods of security selection. This is important when a manager believes some shares are mispriced. The required return on security 'i' is given by: Ri = Rf+(Rm-Rf)Bi Where (Rf) - is a risk-free rate, (Rm) - return on the market, (Bi) - security's beta. The difference between the required return and the actual return expected is known as the security's alpha (Ai). Ai = Rai - Ri, where (Rai) is actual return on security 'i'. Stock Picking One way of stock-picking is to select portfolios of securities with positive alphas. Alpha of a portfolio is simply the weighted average of the alphas of the securities in the portfolio. Ap = {(n*Ai) Where ({) is sigma (sorry for such weird typing, haven't figured out yet how to type proper-looking formulas), (n) - share of 'i'th security in portfolio. So another way of stock-picking is ranking securities by their excess return to beta (ERB): ERB = (Ri - Rf)/Bi The greater the ERB the more desirable the security and the greater the proportion it will make up of the portfolio. Thus portfolios produced by this technique will have greater proportion of some securities than the market portfolio and lower proportions of other securities.  The number of securities depends on a cut-off rate (C*) for the ERB, defined so that all securities with ERB>C* are included in portfolio while if ERB  The cut-off rate for a portfolio containing the first 'j' securities is given by (i'm inserting an image cut from Word below):  Here comes the tricky part: Basically what you do is first calculate ERB for each security, then calculate Cj for each security mix (gradually adding new securities one by one and recalculating Cj each time). Then you select an optimum portfolio by comparing Cj of each mix to ERB's of it's securities. Let me show you a simple example: Say you have securities A,B,C and D you calculated ERB's: ERB(a)=6, ERB(b)=6.5, ERB(c)=5, ERB(d)=4 also you calculated: C(a)=4.1, C(ab)=4.8, C(abc)=4.9, C(abcd)=4.5. Then you check: ERB(a),ERB(b),ERB(c) are greater than C(a), but C(a) only contains security A so C(a) is not an optimum mix. ERB(a),ERB(b),ERB(c) are greater than C(ab), but C(ab) only contains securities A and B ERB(a),ERB(b),ERB(c) are greater than C(abc), and C(abc) contains A B and C so it is an optimum. ERB(d) is lower than C(abcd) so C(abcd) is not an optimum portfolio. Finally the most important part: Below is a formula to find the share of each security in the portfolio:  Here you simply plug in already obtained values for each security to find it's proportion in your portfolio. I hope this somehow answers your question, however there is a lot more than this to consider if you decide to manage your portfolio yourself. Some of the most important areas are:  Market Timing Hedging Stocks vs Bonds  Good luck with your investments! And remember, the safest portfolio is the one that replicates the Global Market.  The cut-off rate for a portfolio containing the first 'j' securities is given by (i'm inserting an image cut from Word below):  Here comes the tricky part: Basically what you do is first calculate ERB for each security, then calculate Cj for each security mix (gradually adding new securities one by one and recalculating Cj each time). Then you select an optimum portfolio by comparing Cj of each mix to ERB's of it's securities. Let me show you a simple example: Say you have securities A,B,C and D you calculated ERB's: ERB(a)=6, ERB(b)=6.5, ERB(c)=5, ERB(d)=4 also you calculated: C(a)=4.1, C(ab)=4.8, C(abc)=4.9, C(abcd)=4.5. Then you check: ERB(a),ERB(b),ERB(c) are greater than C(a), but C(a) only contains security A so C(a) is not an optimum mix. ERB(a),ERB(b),ERB(c) are greater than C(ab), but C(ab) only contains securities A and B ERB(a),ERB(b),ERB(c) are greater than C(abc), and C(abc) contains A B and C so it is an optimum. ERB(d) is lower than C(abcd) so C(abcd) is not an optimum portfolio. Finally the most important part: Below is a formula to find the share of each security in the portfolio:  Here you simply plug in already obtained values for each security to find it's proportion in your portfolio. I hope this somehow answers your question, however there is a lot more than this to consider if you decide to manage your portfolio yourself. Some of the most important areas are: Good luck with your investments! And remember, the safest portfolio is the one that replicates the Global Market. "First, to mention one thing - better analysis calls for analyzing a range of outcomes, not just one; assigning a probability on each, and comparing the expected values. Then moderating the choice based on risk tolerance. But now, just look at the outcome or scenario of 3% and time frame of 2 days. Let's assume your investable capital is exactly $1000 (multiply everything by 5 for $5,000, etc.). A. Buy stock: the value goes to 103; your investment goes to $1030; net return is $30, minus let's say $20 commission (you should compare these between brokers; I use one that charges 9.99 plus a trivial government fee). B. Buy an call option at 100 for $0.40 per share, with an expiration 30 days away (December 23). This is a more complicated. To evaluate this, you need to estimate the movement of the value of a 100 call, $0 in and out of the money, 30 days remaining, to the value of a 100 call, $3 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.40 to $3.20. Since you bought 2500 share options for $1000, the gain would be 2500 times 2.8 = 7000. C. Buy an call option at 102 for $0.125 per share, with an expiration 30 days away (December 23). To evaluate this, you need to estimate the movement of the value of a 102 call, $2 out of the money, 30 days remaining, to the value of a 102 call, $1 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.125 to $ 1.50. Since you bought 8000 share options for $1000, the gain would be 8000 times 1.375 = 11000. D. Same thing but starting with a 98 call. E. Same thing but starting with a 101 call expiring 60 days out. F., ... Etc. - other option choices. Again, getting the numbers right for the above is an advanced topic, one reason why brokerages warn you that options are risky (if you do your math wrong, you can lose. Even doing that math right, with a bad outcome, loses). Anyway you need to ""score"" as many options as needed to find the optimal point. But back to the first paragraph, you should then run the whole analysis on a 2% gain. Or 5%. Or 5% in 4 days instead of 2 days. Do as many as are fruitful. Assess likelihoods. Then pull the trigger and buy it. Try these techniques in simulation before diving in! Please! One last point, you don't HAVE to understand how to evaluate projected option price movements if you have software that  does that for you. I'll punt on that process, except to mention it. Get the general idea? Edit P.S. I forgot to mention that brokers need love for handling Options too. Check those commission rates in your analysis as well." In the U.S. it is typical that a stock brokerage account can be set up to buy stock with up to half the cost being borrowed from the broker.  This is called a margin account.  The stock purchased must remain in the account until sold (or the loan is paid off), as it serves as built-in collateral for the loan.  If the market price for the stock goes down too much, you will be required to add money, or the stock will be sold to cover the loan. See this question for some more information.