• Margin trading a very complicated concept for investors
• Young traders are “learning right now”
As Shark Tank star Kevin O’Leary recently revealed on CNBC’s “Squawk Box Asia,” he made an investing mistake at a younger age that he would never make again – now he’s warning young traders not to make the same mistake.
O’Leary warns young traders
“When I was a young buckaroo trader, I used margins and got put down. And I never did it again,” O’Leary explained in the interview. “I believe every generation is being taught a lesson in margin, including me,” said the venture capitalist and chairman of O’Shares ETFs. “You can tell any young investor who has never seen a bear market…but it’s not until they experience the fear, the darkness, and the complete deletion of their account that you learn.” According to O’Leary, it’s very important for young traders to learn this, “and they’re learning it right now.”
Trading on margin
According to O’Leary, margin trading is “a very, very, very complicated concept for investors.”
Basically, buying on margin means that an investor borrows money from a broker to buy assets. This gives the trader the chance to make profits that he would otherwise not have been able to make – but when prices fall, the risk also increases because leverage is created.
For example, if a CFD investor only has to deposit a margin of 250 euros for a position worth 1,000 euros, this results in a factor of four. If the underlying stock moves up or down by one percent, the investor already gains or loses four percent. This is a product lever.
In addition, it should be noted how large the position lever is in such transactions. This indicates the ratio of the position entered to the entire trading depot. If an investor has a balance of 1,000 euros in his account and has a position worth 1,000 euros, the leverage is one – but if he opens a position of 10,000 euros, for example, the leverage increases to ten. If the trade increases by ten percent in this case, the credit already doubles. However, even with a loss of ten percent, the deposit balance falls to zero.
“They don’t get it until they get wiped out on margin calls to zero, and that’s happening in every sector right now, especially crypto,” O’Leary said. In the so-called margin call, if the position loses so much that the deposited margin is attacked, the investor is asked to add money or to close part of the position.
O’Leary told CNBC that just before arriving for the interview, he discussed the topic with his son, who is 25 and has already learned his lesson. “But I also taught him diversification, so he knows you can’t put all your eggs in one basket or [in] a stock or an asset class,” says O’Leary.
“So you win some, you lose some. That’s the way investing works. It’s never straight.”
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