Stock Margins Can Make or Lose You A Lot of Money

By Richard Moran

The initial cause of the Great Depression and stock collapse of October 1929 was all the stock that had been purchased on margin. When the stock prices fell many of the people who had purchased on margin could not cover the margin calls and went bust. That of course was before the financial controls imposed by the government in today's market and theoretically that situation could never happen again although many of those who lost money in the past year may disagree. You can still buy stock by putting only a portion of the cost in hard cash down with the balance being covered by your credit standing and therefore on margin.

Buying Stock Outright

When you buy stocks outright you pay for your stocks at the time you purchase them. For example, you may purchase one hundred shares of stock at fifty dollars per share costing you five thousand dollars. It is over and done, you own the stocks, and they are free to earn you the money instead of earning someone else money. Since most brokerage firms require you to have a minimum equity of two thousand dollars to begin with before buying on margin, it simply makes sense to drop the number of shares you purchase and own them outright.

Buying on Margin

In the margin situation the brokerage house is basically acting as a bank and loaning you the money to purchase the stock. All this is done only on paper of course. If for any reason you don't keep up with the interest payments the broker merely will take the ownership of the stock back, and you may still owe them money, even if the stock did go up. There is very little risk for the brokerage, although many did lose a lot of money in the recent stock market crash. However, even with that most of the money lost was not from marginal stocks but from more exotic forms of investment.

Regardless of How You Pay You Still Must Know What Stocks To Buy

Realistically, if you pick all stocks that go up you are going to make money. Many people have a feel for the market any make their living doing just that. Once you get into margin buying the market becomes more than just a simple investment. You can no longer buy a stock and look in the Sunday paper to see how you did the past week. The potential for loss is high, and you may have to "bite the bullet" and sell a stock before you lose too much on it. Most successful investors use margins sparingly, many times only when they have good knowledge that a stock will rise significantly in the short term.

So Which Way Should You Go?

It comes down to your mindset when it comes to risk. If you will get ulcers worrying about the money you owe on margin it might be a good idea to stay out of the market all together, or buy mutual funds and let someone else worry about the return. Paying cash leaves you in a more flexible position while the margin gives you greater potential. The most important thing is to do your research and invest with your head not your heart. - 23221

About the Author:

Richard Moran is a Business Consultant and maven for Money Helpers. The site contains hundreds of articles, charts, and calculators to aid you in your Business health. All the aspects of the site are free and it is updated on an almost daily basis. If you are searching for any Business aids or products they can be found on Money Helpers.