Learn How Buying on Margin Works
April 18, 1999. Margin is wonderful when it works. It’s horrible when it doesn’t. To see the
potential, take a $20 stock that rises to $30. If you bought for cash, you made 50% on your money. If you bought
on margin, investing just $10 and borrowing the other $10 from your broker, you made 100% on the money you put
up, minus the interest you owe on the loan.
But just as margin enhances your gains, it deepens on your losses. For example, say that your
$20 stock dropped to $10. Cash buyers lose 50% of their money. Margin buyers lose 100% and still have to come up
with the interest they owe on the loan. Investors who trade their accounts online can blunder into debt unintentionally.
For novices, trading is an accident waiting to happen. If you are not an expert on trading online, then it is not
The investors most likely to hear the explosion are those buying volatile stocks on margin accounts.
They think they know what they’re doing, then.bang!! A lot of money has been lost, especially when it takes you
out of the market with less money to trade with.
Many years ago I traded on margin and lost both times when a professional market maker told me
these two stocks were going to go through the roof. The only thing that went through the roof was my blood pressure!
The Federal Reserve establishes minimum margin requirements. At present, you can borrow up to
50% of the value of most stocks. In recent months, many brokers have reduced the amount they will loan on the most