Of the many tools available to help you enhance your investment returns, margin can be indispensable.

But just like any tool, if used carelessly, margin can cause your portfolio serious harm, doubling or tripling your losses if your investment moves the other way. Before using any tool, we need to understand how to use it properly.

For a complex tool, margin really has a very simple purpose — it allows you to borrow funds from your broker to purchase extra shares, thereby increasing your buying power. For example, the heavily traded SPDR Dow Jones Industrial Average ETF NYSE: The more volatile ProShares Ultra Dow 30 ETF NYSE: Did you notice the enormous potential buying on margin affords you?

It allows you to double or even triple the number of shares you can buy. But while this leverage can help you outperform the market significantly going up, it can also cause you to underperform significantly coming down.

In fact, it can completely wipe out your account in a rather short period of time.

Investing on Margin

Buying on margin, then, is a bet that the stock you are buying will not fall more than the percentage you put in. Now we get to the fun part — how to put the positive attributes of margin to good use. Amplifying Capital Gains and Dividend Yield:. The example above — where margin allows us to control a position 3. But that same power of leverage can be used to amplify the yield from any dividend stocks we may have.

We can start with a low risk, moderate yield dividend ETF, such as SPDR Barclays Short Term High Yield Bond ETF NYSE: SJNKwhich currently yields some 5. Not bad at all. This SJNK version of the fund holds shorter duration corporate bonds of 5 years and less, and it will suffer less volatility than its older sister, the SPDR Barclays High Yield Bond ETF NYSE: JNKwhich holds longer duration corporate bonds.

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Sign up for the Wealth Daily newsletter below. You'll also get our free report, " Seven Techincal Analysis Tools for Investors. Margin can also be used to combine the benefits of two stocks into one position. For instance, since we expect equities to continue rising in this low interest rate environment until at leastwe decide we want to be invested in a major index ETFsay the DIA noted above. But we also like the idea of that nice dividend yield from SJNK and other high yielding stocks.

Margin allows us to hold them both, combining the best of both worlds by taking a little cash out of our DIA position and using it to purchase SJNK.

We have all the upside of DIA that we would have had in an all-cash position, plus twice the dividend yield that DIA pays on its own. What margin allows us to do, then, is take dormant cash out of a stock position and put it to work in a higher yielding instrument to boost our return without sacrificing any upside potential. A third application tcs stock options margin comes in handy is riding market cycles up and down.

Buying Stock on Margin - dummies

The longer a market has risen without a correction — as it has for two years already — the greater the likelihood of a pullback. At times like this, you may wish to take precautions and reduce your margin leverage, perhaps not using any margin at all so as not to amplify your losses. Conversely, after the market has corrected, there is considerably less risk in the system.

At times like that you may wish to utilize your margin allowance more fully to increase the number of shares you control. As the market rises, you progressively sell your extra shares and taper your leverage like a pyramid.

Like any tool, margin can increase your productivity as well as increase your danger. Know your tools well, practice with them first, and always use them with care. Buying dividend stocks margin our Privacy Policy.

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Download your FREE report now: How To Invest in the Coming Bitcoin Boom. Three Useful Applications Now we get to the fun part — how to put the positive attributes of margin to good use.

Amplifying Capital Gains and Dividend Yield: The Best Free Investment You'll Ever Make. Stay on top of the hottest investment ideas before they hit Wall Street. The Best Free Investment You'll Ever Stock market trading game pse Sign up to receive the Wealth Daily newsletter - it's absolutely free! In each issue, you'll get our best investment research, designed to help you build a lifetime of wealth, minus the risk.

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Should You Use Margin to Get More Dividend Income?

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