This past August we attended several investor education events put on by TD Waterhouse Discount Brokerage. These events were aimed at educating retail investors on the concepts, practices and strategies that will better prepare them when trading. The most recent session we attended was about margin and short selling.
The session covered a number of topics related to using margin including defining margin trading, trading account types, the benefits and risks involved in margin trading and ways of reducing that risk. Our main takeaways from the presentation on the subject of margin trading include:
- Margin trading is leveraging assets you own or intend to buy
- Leveraging is the degree to which an investor uses borrowed funds to purchase a security
- Benefits include increased buying power, lower debt interest rate and the most interesting benefit of all, you can withdraw cash from your margin credit
Of course where there is a silver lining there is always a cloud. There are a few drawbacks to margin trading but the main one is that you can lose more than you invested. You can help mitigate some of these risks by not over-borrowing, diversifying across securities and sectors and having an exit and margin-call strategy.
Short selling was also covered in this presentation. Topics covered included the definition of short selling with examples, reasons to short sell, trading requirements in short selling, some potential risks and ways of reducing those risks. Our key takeaways for this section include:
- Short selling requires borrowing a security from a broker in order to selling it, then buying back the security to return it to the broker.
- Profits or losses are realized when shares are repurchased to return to the broker
- Losses can be infinite in short selling as there is no limit on share price gain
- Profits are capped as the share price will only go as low as zero
One can utilize the same strategies used for minimizing risks in margin accounts when short selling. These strategies include starting out small, diversifying investments and having an exit and margin-call strategy in place.
Overall the TD Waterhouse Discount Brokerage session on margin and short selling was informative. The presenter was knowledgeable and answered all questions asked throughout the presentation.
These types of education oriented events are a great opportunity to learn more about investing and trading, especially if you’re just starting out. To find more educational events, check out our investor education calendar here.