Stock Leverage Trading Guide: Detailed Explanation of Margin Financing and Practical Applications

In the stock market, many investors are not satisfied with simple buy-and-hold strategies and hope to amplify returns or profit during declines through more effective methods. This is the fundamental purpose of the two trading tools: margin financing and securities lending. This article will explain the operating principles, cost structures, and practical applications of these two tools in an easy-to-understand manner.

Basic Concepts of Leveraged Buying

Margin financing means borrowing money from a broker to purchase stocks. Imagine you are optimistic about a certain stock’s prospects but lack sufficient funds. You can pay a portion of the amount, and the broker covers the rest, with the stock serving as collateral for the loan. This approach is similar to a mortgage—banks lend you money to buy a house, with the house as collateral; similarly, the broker lends you money to buy stocks, with the stocks as collateral.

The biggest advantage of margin financing is leveraging small capital for big gains. Suppose a stock is priced at 100 yuan, and you have only 40 yuan. By using margin to buy, if the stock price rises to 150 yuan, your return will far exceed that of someone who bought the stock outright at 100 yuan.

For example, investor A believes in Apple stock, invests 40 USD at a price of 100 USD, and borrows 60 USD via margin. A few days later, due to strong pre-orders for new products, the stock surges to 150 USD. A sells at this price, earning about 90 USD (150 - 60 - interest), with a return rate of 125%, far higher than the 50% increase in stock price itself.

Costs and Interest Calculation of Margin Financing

Since margin financing involves borrowing, you must pay interest. The annual interest rate in Taiwan’s securities market typically ranges from 4.5% to 6.65%, with interest calculated daily.

Interest calculation formula:: Loan amount × annual interest rate × number of days borrowed ÷ 365

For example, with a large-cap stock like Largan Precision at 2,000 yuan, if you borrow 1.2 million yuan and sell after 20 days when the stock rises to 2,200 yuan, the interest expense is approximately 4,372 yuan (1.2 million × 6.65% × 20 days ÷ 365 days). Due to the erosion caused by annual interest, margin trading is generally not suitable for long-term holding but is used when short-term bullish prospects are expected.

Advantages of Margin Trading

1. Leverage Effect

The same amount of capital can control a larger stock position, multiplying investment returns and creating opportunities for high gains with less capital.

2. Flexible Capital Allocation

The saved capital can be used for diversification, increasing positions in other assets, or responding to market volatility, enhancing overall investment efficiency.

Risk Assessment of Margin Trading

Liquidation Risk: The Greatest Threat

Brokers set a “maintenance margin” threshold for margin accounts. When stock prices fall and the maintenance margin drops below 130%, the broker will notify you to top up the margin. If you fail to do so within the deadline, the broker has the right to forcibly sell your stocks (called liquidation), first recovering principal and interest, with any remaining funds returned to you.

For example, TSMC: Investor B borrows 200,000 yuan at a stock price of 500 yuan and the broker covers 300,000 yuan to buy shares. The initial maintenance margin is 166.7% (50 ÷ 30). If due to geopolitical issues or interest rate hikes, the stock drops to 380 yuan, and the maintenance margin plunges to 126.7% (38 ÷ 30), the broker will immediately require additional margin. If not topped up to above 130% within 2 days, the stocks will be forcibly liquidated the next day.

Interest Erosion of Returns

When stock prices consolidate long-term, buy-and-hold investors may break even or gain little, but margin buyers pay daily interest, which can lead to losses over time. This is why margin investors often prefer swing trading over long-term buy-and-hold.

Poor Asset Selection

Investing in stable stocks with a dividend yield of about 4%-5% using margin may result in annual dividends just offsetting the interest paid, making it not very cost-effective.

Risk Management Strategies

1. Strict Stop-Loss and Take-Profit Settings

Margin amplifies both gains and losses. Use technical analysis to observe support and resistance levels. If the price breaks support, exit immediately; if it reaches resistance without breaking through, take profits to avoid paying interest over the long term.

2. Choose High-Liquidity Assets

Prioritize stocks with large market capitalization and active trading to avoid liquidity issues during black swan events, which could force you to hold positions long-term and pay additional interest.

3. Keep Cash Reserves

Monitor maintenance margin changes closely and keep sufficient cash to meet margin calls, preventing forced liquidation.

4. Staggered Positioning to Reduce Risks

Since it’s impossible to precisely predict the lowest point, buying in multiple batches can diversify risk. If the first purchase happens to be at the bottom, that’s ideal; if the stock continues to decline, additional positions can be added, and profits can be realized when the stock rebounds.

Practical Application of Margin Strategies

1. Seize Opportunities Before Major Positive News

Choose companies about to announce significant positive news but have not yet entered a major rally, allowing for lower-cost entry and profit from subsequent price surges.

2. Diversify Capital Allocation

If bullish on 2-3 stocks simultaneously, divide your margin funds into multiple positions. Even if one consolidates, gains from others can boost overall returns.

3. Use Technical Analysis for Entry and Exit

Combine support and resistance levels, moving averages, and other indicators to improve entry accuracy and discipline in stop-loss and take-profit execution.

Reverse Operation: Securities Lending for Short Selling

If you expect a stock to decline or believe it is overextended, you can profit by securities lending (borrowing stocks from the broker to sell). When the stock reaches your target price, buy back and return to the broker, pocketing the price difference.

When borrowing stocks, brokers usually require you to deposit cash equivalent to 90% of the stock’s market value as collateral.

Key Points to Note About Securities Lending

Usage Period: In Taiwan, securities lending must be repaid before ex-dividend date or shareholder meeting, so investors need to closely track the “last repayment date.”

Maintenance Margin Risk: If the stock price rises instead of falling, losses increase, potentially causing the maintenance margin to fall below the required level, risking forced buyback.

Short Squeeze Risk: Some major players may deliberately push up stocks with high securities lending ratios, forcing short sellers to cover at higher prices and profit from the rally. Short sellers should monitor securities lending data carefully.

Summary

The essence of stock trading lies in a deep understanding of the fundamentals of the target and the overall economy, combined with precise technical analysis for timing. Using appropriate trading tools is key to profitability. Although margin financing and securities lending carry higher risks, proper use can significantly amplify returns. Successful investors neither blindly avoid leverage nor overly rely on it but execute trading plans with discipline after careful consideration. Only then can they achieve long-term stable profits in the ever-changing stock market.