One other thing about margin, since we are on the subject. It's a dangerous game. If you are ever dealing with a broker who is opening a new account for you, and he urges you to open a margin account, it's a red flag. Most reputable brokers shy away from opening new accounts on margin, because they don't know you and they don't know your trading habits. If you are urged to open an account on margin, the chances are that the broker is trying to generate a higher commission. This means that he may not have your best interests in mind. As a matter of fact, a good broker will probably try and talk you out of opening an account on margin even if you request it.
Once you start trading in margin money, it's easy to justify a loss because you "don't have to pay for it". You can get the idea that you can borrow more and more, and if you are not careful, you can get into serious trouble. You are paying about 7% per annum on the loan. If the equity you borrowed against goes down to a certain level, you will get a "margin call", which means you either put some cash in the account in 3 days or less, or the brokerage sells some of the stock you borrowed against to cover the debt. Margin calls are kind of like your wife telling you she wants a divorce...not fun at all.
The up side is that you do have borrowing power, and you can use it to make money if you are astute. Just remember that margin money is borrowed money, you are paying interest, and the brokerage doesn't give a flying f if you can cover a margin call or not, because they have your stock, and they will sell it if you can't cover the margin call. |
