What is margin?

Trading stocks on margin seems like a great way to make money. If you have a few thousand dollars in your account, you might qualify to borrow money against your existing stocks at a low-interest rate. You can use that borrowed cash to buy even more stock. 

In theory, this could leverage your returns.

Before investing, you must know the RISK!

The reality: Margin trading is an inherently risky strategy. 

It allows aggressive traders—both individuals and institutions—to buy more shares than they could otherwise afford. When things go according to plan, these investors make a lot of money. When things go south, it can get really ugly, really quickly.

How does margin trading work?

To explain in a simple way, we assume there are no interest costs in margin trading, which is the opposite in reality. 

Imagine you have $500 in the trading account, which is your maximum buying power. However, to buy 10 shares of company A (each share is worth $100), you need $1,000 in total.

With margin trading available, you can fund half the purchase price with your own money and buy the other half on margin.

Good scenario:

One year later, the share price rises to $200. You can sell the shares for $2,000 and pay back the broker the $500 borrowed for the initial purchase. Ultimately, you triple your money, making $1,500 on a $500 investment.

Bad scenario:

After a year, if the share price falls by half to $50, you sell at a loss and receive $500. Since this equals the margin amount, you lose 100% of the $500 initial investment.

How much can investors borrow?

For the proposed IPO, each brokerage firm will decide the amount they can lend to their clients for stock purchase based on their own risk assessment of the IPO, with the maximum bar multiplier generally not exceeding 9 times. 

That is, if there are $100 in the account, the margin amount is up to $900. 

However, not all stocks can be used to pledge margin trading.

How is margin interest calculated?

The margin interest is calculated from the subscription deadline to the announcement of the results. 

Assuming that the subscription deadline is November 4, the IPO is listed on November 12, and the results are announced on November 11, the interest will be calculated from November 4, and the margin will be used for a total of 8 days. 

Total interest payable = 900*2%*8/365 （2% interest rate）