How to use Margin Smartly Without Putting Your Portfolio at Risk?

One careless step in leveraged trading can set you back exponentially more than any profitable trade is ever worth. Most investors jump into leveraged trades hoping for easy, rapid profits and end up watching their investments melt away faster than they anticipated. 

In fact, the dilemma between using leverage productively and using leverage to generate regret hinges on a single characteristic. Capital markets let traders borrow against their holdings through a margin trading facility, amplifying potential profits and potential losses. 

Let’s explore five practical, disciplined approaches to using margin wisely for investors to keep their portfolio safe.

5 Disciplined Strategies for Using Margin Without too Much Risk

Margin trading facilities benefit thoughtful people and punishes careless ones. Here are 5 ways to use leverage responsibly to complement your portfolio.

1. Don’t Use Margin Unless you Have a Clear Investment Plan

Investing using borrowed funds with no defined target is the most common pitfall an investor faces. Each rupee taken on a margin trading facility should have a clear purpose linked to a researched opportunity.

Your entry, exit price, and target are to be determined beforehand before putting on a margin position. Entering a position because of noise around it and no justification through data only increases your exposure unnecessarily.

2. Borrowing Small Amounts Leaves a Buffer in Case of a Market Fall

If you are using your maximum borrowing margin trading facility immediately, there is not enough leverage available to compensate for even a small market downturn.

The best traders will borrow a small proportion, generally not more than 30-50% of the margin available to them. The amount that you owe against the size of your portfolio acts as a shock absorber in choppy market conditions.

3. Broaden the Scope of Your Investments

Putting all your loan money into one stock or one sector magnifies the pain if one trade turns out poorly. With a concentrated margin trading facility position, one losing trade can erode gains across the whole of your portfolio.

Investing in multiple different sectors, asset classes, market caps, and brokers with the highest instant pledge margin mitigates the negative effect of a poor-performing single investment.

4. Review Your Margin Position

Margin trading does not equate to a ‘set and forget’ solution. You will have to actively monitor the performance and leverage of your portfolio on an ongoing basis. 

Review your percentage of margin utilisation on a weekly basis, and also review it straight after large moves in the market. If there is a reduction in the value of your equity, it will lead to an increase in your percentage of margin utilised. 

5. Figure out Your Repayment plan 

A margin trading facility investment is all about when to get in. However, few are focused on how and when they are going to pay back a borrowed sum of money.

Knowing how and when you intend to pay back a credit facility, at the moment of access, will add a fixed aspect, and not just an open-ended obligation. Either you get money back from a profit that you make through a trade, from salary, or from the sale of an asset. 

Let the use of Smart Margin Empower Your Investment

Always consider the function of a margin facility as a sophisticated financial tool and not as the quickest route to profits or a way to get out of previous holes. The investors that will benefit most from the availability of a margin trading facility are those who use borrowed funds prudently and repay them methodically. 

Approach every decision involving margin with thoughtfulness, diligence, patience, a spirit of preparedness, and a commitment to a long-term approach.  Solid investment portfolios cannot just be built with smart stock choices, but require smart behaviours at all times and at all levels.