Risk Management

Margin can be used to manage risk either through employing hedging strategies or just generally increasing the overall diversification of your portfolio.

Hedging

One way to hedge, or make an investment that reduces the risk of another investment, is through short selling. When you enter into a short trade to hedge, you're using your short position to offset or protect a long position.

By holding both a short and long position in the same security, you're potentially managing the risk associated with the security by attempting to ensure that a move in either direction won't make or break your portfolio.

A margin account is required for short selling.

Overall Diversification

Another way to use margin as a risk management tool is to apply the funds you borrow toward the task of diversifying your portfolio. By diversifying your holdings, you're attempting to manage your portfolio according to your risk tolerance. In theory, more diversified portfolios offer lower exposure to risk. Keep in mind that margin should supplement your overall risk strategy when used this way.

As a risk management tool, margin can provide additional funds to help you purchase multiple securities with low correlations to one another thereby attempting to ensure that your portfolio isn't entirely dependent upon one sector, industry or stock.

Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against loss, in a down market.

This article is for information purposes only and use of strategies does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security or account type before making an investment decision. Scottrade's margin agreement is available at scottrade.com, or through a Scottrade branch office, and contains the Margin Disclosure Statement and information on our lending policies, interest charges, and the risks associated with margin accounts.

The information and content provided in the Scottrade® Knowledge Center is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.