Stock Margins Can Make or Lose You A Lot of Money
You can use someone else's money to leverage your capital for stock purchases. That is buying on margin and is the same as buying other things on credit. The difference comes to the control you have over your investment - with the stock market you are at the whims of the day-to-day market fluctuations. Many of the recent financial problems drove the market down and therefore lost money for those who held their stock on margin. These circumstances left many stocks at all time slows.
Buying Stock Outright
Cash is still the best way to purchase any investment. Buying stock on margins will necessitate the price of the stock rising enough to not only cover your cost and fees, but enough to cover the interest charges imposed by the stock firm offering the margin purchase. Unless your crystal ball is a good one, and your stock picks take off, that is a lot of pressure for the stocks price to rise. Of course if the price falls you are still responsible for that loss plus any interest due on the original purchase price. You may owe quite a bit more than the stock is worth when you sell.
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.
Knowing the Stocks you 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.
On Margin or Outright
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. - 23208
Buying Stock Outright
Cash is still the best way to purchase any investment. Buying stock on margins will necessitate the price of the stock rising enough to not only cover your cost and fees, but enough to cover the interest charges imposed by the stock firm offering the margin purchase. Unless your crystal ball is a good one, and your stock picks take off, that is a lot of pressure for the stocks price to rise. Of course if the price falls you are still responsible for that loss plus any interest due on the original purchase price. You may owe quite a bit more than the stock is worth when you sell.
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.
Knowing the Stocks you 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.
On Margin or Outright
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. - 23208
About the Author:
Richard Moran is a Business Consultant and writer for Money Helpers. The site contains 100's of articles, charts, and calculators to aid you in your Business well-being. 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.
posted by X - Men @ 5:28 AM
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