RE: margin calls
Hi Patrick. Let me offer my 0.02 on margin requirements. All I can comment on is the rules at Action Direct, a discount broker arm of Dominion Securities (the largest brokerage in Canada).
I can not earn excess margin on anything trading on VSE or ASE - period. For TSE and MSE stocks must be on a 'list' of eligible stocks. Generally speaking the TSE and MSE stocks must trade consistently over $3.00 Cdn to be eligible for margin.
The brokerages' list also indicate the extent of margin offered, starting at 50% for eligible stocks, and going as high as 70% (but I'm not sure about the upper limit).
Here is a ficticious example which will have a lot of truth for many investors:
For example someone owning 5,000 of BXM which consistently traded b/w $19-26 for a long time would have excess margin of $48-65K. They could purchase additional securities, mutual funds etc. trading on any exchange and any price.
Note - 5000 BXM is not very much for 1,000's of investors as this would have cost less than $10,000 if purchased in 95/early 96 (if my memory serves me correct).
Well most of those lucky (unlucky) investors purchased additional mining and exploration stocks and became overnight experts. I too was one of them but sold out all of my BXM position last summer.
The stock went from around $20 to 15 in less than a week earlier this month. Suddenly not only has your 5000 BXM investment lost $25,000 but your margin limit has dropped from $50,000 to $37,500. For anyone who had borrowed aggainst their BXM shares more than 38% of their 50% limit they were already in trouble earlier this month.
Now the big blow. Even before trading resumes last week most brokerages had removed BXM as margin eligible and began making margin calls. For many playing speculative mining and expl stocks you suddenly have no, nothing, zero, margin loan and you get the call.
No problem you'll just sell 3500 of your BXM at around $15 to cover. OOPS - BXM just fell to under $3. Your 5000 shares are worth less than $15,000. You dump those and still must dump another $35,000 worth of other stocks just to clear your margin call and repay your loan! But of course all of your stocks have also just dropped 20-50% in value. You might not even have enough equity in your porfolio to cover your margin call. Cash on hand? Not likely as you have done so well in the market you pump everything back into it. House, car, children's college money?
My thoughts and prayers go out to all who are trying to cope with this scenario this Easter weekend.
MARGIN - A VERY DANGEROUS GAME INDEED. ALL OF THIS FROM AN INITIAL INVESTMENT OF AROUND $10,000
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