The basic thing about it is that once you have filled out the margin paperwork and been approved, you are set to use the margin at any time you want. Non-margin is called Type 1 account, margin is called Type 2 account. (Shorts are Type 3). If you had 1000 shares of INTC in your type 1 account, and your margin paperwork was approved, you could borrow against your INTC shares to buy something else (even a non-marginable stock). The brokerage charges interest for the loan, just like any other loan. The moment you borrow against that INTC, it goes into the Type 2 account.
Let's say you bought 1000 shares of a 3 buck (non-marginable; you have to pay 3 grand to buy 1000 shares) NASDAQ stock last Friday, using margin money, (money you borrowed against your INTC shares). That 3 dollar stock goes into your Type 1 account, since you paid for it in cash. So now your INTC is in Type 2, and your 3 dollar stock is in Type 1. On Monday, the 3 buck deal goes to 4 bucks. You sell, and the proceeds would then automatically pay off your Type 2 account (most firms do it automatically, but you have to check for sure) and you then have your INTC and your cash proceeds in your Type 1 account, (minus commissions and interest on the loan). You would not pay interest on the value of all the INTC shares while they were in Type 2, and the interest stops once you move it back to Type 1. You would pay interest only on the amount of money that you borrowed to buy the 3 dollar stock, and only for so long as you borrowed the money.
Let's say the trade goes the wrong way. You sell at a loss of $1,000 dollars. You now have a "margin debt" of $1,000 plus commissions and interest. It shows up on your statement. You have borrowed money against your INTC, and that money must be paid back at some point. For example, INTC goes up and you sell a few shares to pay the debt. Or, you put cash in to pay it and move the INTC back to Type 1. Or, you buy something else to make back the loss, and pay off the debt that way.
You can borrow cash for anything against your INTC, you can take cash out of the account and buy a boat if you want. The only problem is that it is a loan, and you have to pay it back. If you borrowed a lot of money, and then INTC went down enough so that there was not enough equity to cover your loan, the broker will sell your stock to cover it and you lose all the stock. If the sale doesn't cover the loan, you still owe the unpaid balance to the broker.
In the crash of 1929, margin was 10%, in other words, to buy 1000 shares of a 50 dollar stock, you could put 5 grand in your account and own the 1000 shares on margin. But if the stock goes from 50 to say 3 bucks, you have a $40,000 problem, and you must jump out of a window.
That's it in a nutshell. |
