Types of Trades: 3 Ways to Buy and Sell Stocks in Your Portfolio

There are different ways to make stock trades in your portfolio. 

Most investors set aside a portion of their income to purchase securities. While that is one way to invest, it isn’t the only way. There are also ways to borrow money for investing, which increases your purchasing power and possibly your returns — or your losses.

The type of trading you do will depend on your goals and risk tolerance. Be mindful that where there is the possibility for greater return, there is an increase in risk, too.

Erika Taught Me

  • Physical trading uses cash you deposit into a brokerage account to purchase securities.
  • Margin trading uses borrowed money to amplify your returns.
  • Short selling bets on a stock’s price to go down — and comes with the potential of big losses.

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Physical Trading

The most common type of trade to make in your portfolio is to physically trade securities. This refers to buying assets like stocks and bonds with your own money.

You do this by depositing cash into your brokerage account. You can then purchase securities and add them to your portfolio. 

You can also automate a portion of your paycheck to regularly deposit into your brokerage account through dollar cost averaging. This strategy allows you to purchase stocks continuously and gradually increase the size of your portfolio over time.

Another option is to use interest from fixed-income assets to buy stocks. This is known as dividend investing and it generates cash flow in your portfolio. You can then use that cash to purchase new securities.

You can use a brokerage app like Webull to set up automatic re-investing of your dividends, so your portfolio will keep growing without you thinking about it. 

Assets like real estate investment trusts (REITs) regularly pay out a portion of their profit as dividends. You can invest in REITs through a platform like Fundrise for as little as $10. 

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With physical trading, the number of securities you’re able to purchase is determined by the amount of money you have in your brokerage account. 

If you have $100, for example, that means you have $100 in purchasing power. This would be enough to purchase a share of Starbucks stock, but you’d have to deposit more before you could purchase a full share of Amazon.

However, some brokerage apps, such as Webull, also allow you to invest in fractional shares for as little as $5 if you can’t afford to purchase a full share.

The benefit of physical trading is that once you purchase a security, it’s yours to keep. You can hold it in your portfolio for as long as you want.

Margin Trading

Margin trading is when you borrow money to invest. It’s similar to taking out a mortgage to buy a house — but instead of using the money to purchase property, you use it to purchase securities.

Not all brokerages offer margin trading, and you need to have a minimum of $2,000 to borrow money from your broker, which you then use alongside your own cash. Also, these loans do come with interest.

Margin trading increases your purchasing power, allowing you to invest in more securities than you would otherwise be able to. However, it also exposes you to greater risks if a stock or the market in general goes down.

Unlike physical trading, when you invest on margin you don’t fully own the assets outright. Securities purchased on margin are held in a margin account and used as collateral against the money you borrowed to purchase them. This is a way for brokerage firms to lower their risk.

What is a margin call?

While borrowing money can help increase the value of your portfolio, it also makes you a credit risk. 

Brokers have minimum thresholds of equity for margin accounts — these are known as maintenance margin. If the value of a margin account falls below the threshold, a broker may issue a margin call.

When a margin call happens, you may have to deposit more cash or put up additional securities as collateral to bring the account up to the required value. If you can’t do that, the broker may issue a forced unwind without your consent.

A forced unwind is when the brokerage firm liquidates some or all of the assets in a margin account to cover their losses. So, even if a security recovers later on, you won’t have those shares to generate gains from.

Margin call example

Let’s say you create a $10,000 portfolio. Half of your portfolio was purchased using your own money while the other $5,000 was bought on margin. 

Your brokerage firm has a 25% equity requirement, which means the account cannot fall below $2,500.

After a bad earnings call, the stock you invested in took a nosedive. Your portfolio is now worth $6,000 instead of $10,000. 

But you purchased these stocks on margin, which means you took out a $5,000 loan — and now you have to subtract that from the current value of your account.

When you subtract the $5,000 loan from your $6,000 portfolio, you only have $1,000 in equity. This is below the $2,500 threshold, prompting your broker to issue a margin call.

But what if you don’t have any cash to deposit into your account? Then, the brokerage firm issues a forced unwind and sells some of your stock to bring your account current. 

You now have fewer shares of stock than you originally did and are still liable for the $5,000 margin loan you used to set up your portfolio. 

If your portfolio continues to underperform, your broker could issue another margin call. If that happens, you could be on the hook to pay back the loan without owning any of the assets you originally bought with it.

With margin trading, your losses are amplified — you can lose your original investment without owning any assets. It’s a risky way to invest, which is why we generally don’t recommend it unless you’re an extremely advanced investor or can handle the risk.

Short Selling

Short selling is a type of trading where you profit from a drop in the market or a decline in a stock’s price.

With a short sale, you borrow shares of stock from a long-time holder of that stock at their brokerage firm. 

You then sell those stocks, anticipating they’ll go down in price. The goal is to buy back the stock at a later time at a lower price. You then return the stock to the original owner while pocketing the difference.

An example of this is the GameStop short of 2021. Large hedge funds shorted GameStop's stock and meme investors on Reddit took notice. They started purchasing the stock, increasing its value. 

As the price went up, losses mounted for the institutional investors who betted on the stock to decline. At least one hedge fund lost $6.8 billion in a single month due to the short. 

While you might not be dealing with a multi-billion-dollar portfolio, that doesn’t make short selling any less risky. It’s highly speculative and you’re more likely to be wrong than you are right.

Sometimes short sellers pick the right stock to go down and win big. Other times, a stock goes up and they have to purchase the stock back at a higher price, losing money.

With short selling, you can not only lose the value of your original investment, but you can wind up losing more than the stock is worth.

TL;DR

Physical trading is the most common and least risky form of trading stocks. You buy the shares using your own money and own it outright until you sell.

Margin trading and short selling are more advanced — and highly risky — forms of trading. With margin trading, you borrow money to purchase more shares than you can afford. With short selling, you borrow shares and then sell them off, hoping to turn a profit.

While it can be a bit fun to jump on riskier investments, like the GameStop short in 2021, only try that type of trading if you can afford to lose the money you put in — and then some.

For more investing insights, check out these episodes of the Erika Taught Me podcast:

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.