Buying Stocks on Margin

October 5th, 2011 by admin Leave a reply »

Should I buy stocks on Margin?

Margin is the act of buying stocks using borrowed money through your broker. The amount of margin you can use is decided upon by your broker and the size of your account. Basically, the broker will lend you money based upon your accounts worth. Very similar to borrowing money for a mortgage on a house. In that scenario the bank looks at your value and what you can put down, then they loan you the rest for the house. With margin, you are attempting to use borrowed money to make a much larger gain. As you can easily see, borrowing money to invest in the stock market can be quite risky. If you buy in a bull market and use all the funds leveraged to you, you will make much more money than you would have without using margin. The same goes for a bear market and taking a loss. You can then lose much more money than you expected. Margin is a dangerous game.

Margin specifiics:

For some, the above paragraph can be vague and misleading. Let’s get factual.
Investor purchases 100 shares of company A at 20.00 for a total cost of 2,000. He then borrows on Margin another 2,000 and purchases another 100 shares of company A. Total cost 4,000 with a total investment of only 2,000.
Positive outcome: The stock rises to 25.00 per share. Investor sells all 400 shares AT 25.00 for 5,000. He pays off the 2,000 he borrowed to the broker and now has 3,000 left. This is 1,000 more than he started with for a gain of 50%

Negative outcome: The stock drops 5.00 to 15.00 a shares and the investor sells the 400 shares. Now the investor only sees a return of 3,000 with 2,000 being paid to the broker and only 1,000 being left in the account. This is a 50% loss and hurts! Depending on the amount your account is worth, you may get a “margin call” investors and traders hate these.

The Margin Call: This is when the broker calls you up and asks you to replenish your account to make it more equitable. If you are down 50%, the broker is now exposed more and doesn’t want to be. They will ask for more money in the account or sell your shares to avoid taking a loss.

If you are buying stocks on margin, 1.ensure you have enough money, or investments that you can pay off any type of margin loss. 2. Have a plan on what your doing with the margin and how you will handle any profits or loss. 3. keep a constant eye on your stocks, charts, filings, and news. 4. Remember your paying interest on margin. Anything not going up is costing you money!

Please share with other stock traders!
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