What is financing? A complete guide to stock leverage trading

Stock investing may seem simple, but in reality, there are many tools that can help investors profit in the market. Many beginners only know how to directly buy stocks to become shareholders, but they are unaware that there are more ways to quickly profit when stock prices rise or to operate inversely during declines. To truly grasp market opportunities, one must understand the logic behind margin financing and short selling, as well as the associated costs and risks.

What is Margin Financing? Leveraging to Amplify Investment Effects

The core concept of margin financing is simple: you provide part of the funds, and the brokerage provides another part to jointly purchase stocks. The stocks purchased serve as collateral.

Imagine you are optimistic about a certain stock but have limited funds. Instead of waiting to accumulate enough capital, you can immediately participate using the margin financing mechanism. What are the benefits of doing this? You only need to invest a portion of your capital but can fully participate in the stock’s price movements.

For example: Xiao Wang has only $40 but is bullish on Apple stock. He decides to buy through margin financing when Apple’s stock price is $100. The broker lends him $60, and he uses his $40 plus the borrowed $60 to buy 1 share. If Apple’s stock price rises to $150, he sells and gains about $90 (150 - 60 - interest). A 50% increase yields a 125% profit.

This is the power of margin financing—using small capital to fight big.

How to Calculate Margin Financing Costs?

Since you borrow money from the broker, you naturally have to pay interest. Margin interest is calculated daily, using the formula: Margin Interest = Margin Loan Amount × Annual Interest Rate × Borrowing Days ÷ 365.

In Taiwan’s securities market, the annual interest rate for margin loans typically ranges from 4.5% to 6.65%. If you borrow NT$1.2 million to buy stocks and hold for 20 days before selling, you’ll pay approximately NT$4,372 in interest. Because annual interest can be substantial, margin trading is usually used for swing trading rather than long-term holding, especially when investors anticipate major positive news from a company.

The Double-Edged Sword of Margin Buying: Opportunities and Traps

A powerful tool to amplify investment returns

Through margin financing, investors can participate in more stock price movements with less capital, making their funds more flexible. They can add positions at lows or diversify into other assets to reduce risk.

The biggest hidden danger: Liquidation risk

This is a risk that margin users must take seriously. When stocks decline, brokers set a “maintenance margin,” and if the stock price falls below this level, they will notify investors to deposit additional margin. If not rectified promptly, the broker has the right to force sell your stocks, a process called “margin call liquidation.”

For example: Xiao Wang bought TSMC on margin at NT$500, investing NT$200,000 himself and borrowing NT$300,000. The initial maintenance margin is 166.7%. If the stock price drops to NT$380, the maintenance margin drops to 126.7%, and the broker issues a margin call. Investors must top up the margin to above 130% (to avoid forced liquidation) or restore it to above 166.7%.

If the stock price continues to fall and the maintenance margin drops again, the broker will notify for additional margin, and if not rectified, the position can be forcibly liquidated the next day.

Interest Erosion of Profits

If stocks are in a long-term consolidation phase, holders may break even or make no profit, but margin users will continue to incur interest costs. This is why margin trading is more suitable for swing trading rather than “buy-and-hold investors.”

Three Major Strategies to Avoid Margin Risks

1. Asset Selection and Timing Judgment

The purpose of margin is to amplify gains, but it also amplifies losses. Choose large-cap, highly liquid stocks to avoid forced liquidation or liquidity issues during black swan events. The ideal entry point is before a company announces major positive news, before the stock enters a main rally phase.

2. Set Disciplined Stop-Loss and Take-Profit Points

Use technical analysis to observe support and resistance levels. If the stock breaks support, cut losses immediately; if it rises to resistance and cannot break through, take profits. This helps prevent long-term holding costs due to interest erosion.

3. Layered Positioning and Industry Diversification

While it’s impossible to perfectly predict the lowest point, fundamental and technical analysis can help identify relatively low entry points. Buying in stages can lower the average cost; if the first purchase is at the bottom, you can fully participate in subsequent rises. If prices continue to fall but confidence remains, you can add second and third batches of funds. Additionally, margin trading allows you to diversify across 2-3 different industries. If all go well, you profit; if one consolidates and another rises, you can still gain.

Short Selling: A Tool for Inverse Profits

Margin financing involves borrowing money to buy stocks, while short selling is the opposite—borrowing stocks from the broker to sell.

Margin financing’s collateral is the stocks themselves, whereas short selling’s collateral is cash, usually about 90% of the stock’s market value. Skilled investors profit not only in rising markets but also find opportunities in falling markets.

Three Key Points of Short Selling

Term Limitations: In Taiwan, short selling must be closed out before ex-dividend dates or before shareholder meetings. Investors need to pay attention to the “Last Short Sale Repayment Date.”

Maintenance Margin Risk: Short selling profits from stock declines, but if the stock price rises, investors face the risk of insufficient maintenance margin and forced buy-in. Brokers will buy back the stocks forcibly, and investors bear the losses.

Short Squeeze Risk: Since short selling has a time limit, some investors target stocks with high short interest to push prices up, forcing short sellers to cover at a profit. This is known as a “short squeeze.”

Summary: The Perfect Combination of Knowledge and Tools

The essence of investing always lies in a deep understanding of the target and the overall economy, combined with technical analysis to predict stock movements, and the use of appropriate tools to generate returns. While margin trading and short selling carry risks, proper use can bring substantial rewards.

Grasping market dynamics, understanding the mechanisms and limitations of each tool, and employing disciplined strategies are the keys to consistent success in the stock market. Whether pursuing swing profits or inverse operations, the core lies in risk awareness and execution ability.