Hi Mad2; Re what happens to "bad" stocks when margin calls go out to "good" stocks.
I've seen this in action many times. The typical investor in unmarginable stocks also has investments in marginable ones. When he gets a margin call, he doesn't want to sell, cause that would either give him tax problems, or force him to admit that he is stupid. So faced with the requirement that he sell something, he sells a few shares of the unmarginable stocks before the marginable ones.
The reason is pretty simple. If you sell $1,000 in unmarginable stocks your account margin improves by $1,000. But if you sell $1,000 worth of, say, 50% marginable stocks, your account margin only increases by $500.
It's just how can you get rid of the margin call with the least selling activity in your portfolio. To do that, you get rid of the unmargined stocks first.
If anybody finds this principle confusing, just remember that you can buy a lot more MSFT on margin than you can buy of another stock, that isn't marginable. So a guy might have to choose between selling $1000 of his unmarginable securities or $2000 of his 50% marginable ones. Since he is a loser, he reduces his equity risk by the minimum amount possible, and only gets rid of $1000 of unmarginable stuff. This way, his continued exposure to the market is maximized. If his stocks continue to drop, he ends up dumpster diving for dinner. It's a fairly entertaining process to watch.
-- Carl |
