4 Tips for Managing Margin Risk
- Leverage Responsibly – Similar to credit cards, it may be a good practice to borrow less than the amount you have available from your margin loan. In other words, you may not wish to fully leverage your assets. For example, let's say you have a margin buying power of $30,000. If you put all $30,000 toward purchases, a slight decrease in the market value of a single security could trigger a maintenance call.
- Keep a Diversified Portfolio as Collateral – Heavily concentrated portfolios run the risk of incurring a maintenance call when the value of a single investment declines. Keep your portfolio well diversified to manage margin calls and market risk.
- Monitor Vigilantly – It's important to evaluate your risk regularly and make sure margin continues to fit into your trading strategy, especially during changing market conditions. Be aware of the increased risk that comes with margin and anticipate amplified losses. Have a plan ready for when losses occur.
To help you monitor your portfolio, we offer real-time account alerts in the Scottrade client website, Scottrader Streaming Quotes and ScottradeELITE. You may also want to consider using limit and stop-on-quote orders to attempt to control your entry and exit points.
- Stick to a Plan – Developing a plan and sticking to it can help you avoid emotional trading outside of your risk comfort zone. Assess your risk tolerance early on, develop a plan for managing risk in your account and stick to your plan regardless of market changes and tempting opportunities outside your strategy.
Diversification does not assure a profit, or protect against loss, in a down market.