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As you know, when you buy a stock in the traditional way [straightforward stocks, as described in the previous section], you make the same percentage of profit as the movement in the stock. For instance in the earlier example, if Microsoft moves up from $30 to $33, then your profit on the 100 shares would be $300, or 10%. This is fine for some traders...
However, many traders prefer to 'gear up’ their trading, allowing them to control more stock with less capital. Typically, you can control [buy] any amount of shares for around 25% of the capital deposit requirements, which is a 4:1 gearing [some brokers offer 50%, or 2:1]. So, buying 100 shares at $30 does not mean you have to put up $3,000 capital, but around 25% [or $750]. This is possible through margined stock trading. It is very simple...
All you are doing, is basically buying a stock, then putting up only a quarter [25%] or a third [33%], depending on what the broker allows. Now, if Microsoft stock moves UP from $30 to $33, then your profit would still be $300, but your capital would have been $750 [based on a 25% margin]. This is a 40% profit, which is better than 10%.
Check with the broker their margin requirements for stock trading - some will offer 25%, others 33.3% [one third] or 50%.
Next, we will take a look at spread betting and CFD trading...
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