"Margin" is borrowing money from your broker to buy a stock and using your investment as collateral. It increase the purchasing power and own more stock without fully paying for it.
You buy a stock for $50 and the price rises to $75. On margin, paying $25 in cash and borrowing $25 from your broker will earn a 100 percent return on the money you invested. Of course, you'll still owe your firm $25 plus interest.
If the stock price decreases, substantial losses can mount quickly. For example, the stock you bought for $50 falls to $25. On margin, you'll lose 100 percent, and you still must come up with the interest you owe on the loan.
In volatile markets, investors who put up an initial margin payment for a stock may, from time to time, be required to provide additional cash if the price of the stock falls.
The brokerage firm has the right to sell their securities that were bought on margin – without any notification and potentially at a substantial loss to the investor. If your broker sells your stock after the price has plummeted, then you've lost out on the chance to recoup your losses if the market bounces back.
In other word, the Brokerage owns everything by lending you a some.
Just a scary thought.
No comments:
Post a Comment