Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (260490)	9/15/2003 5:27:12 PM
From: KM	Read Replies (4) \| Respond to of 436258

Interesting they feel the need to do this. Reuters NASD warns U.S. investors about buying on margin Monday September 15, 3:31 pm ET By Jonathan Stempel NEW YORK, Sept 15 (Reuters) - NASD on Monday warned against the dangers of buying "on margin," after a surge of borrowing by U.S. investors hoping to take advantage of the recent rise in stock prices. ADVERTISEMENT The NASD, which regulates all 5,300 U.S. brokerage firms, issued the alert after purchases of securities on margin increased 25 percent this year, reaching $174 billion in July. Margin involves borrowing money from a brokerage firm to buy securities. Investors must pay back what they borrow, plus interest, even if their investments lose value. The strategy can magnify gains, and losses. Citing a "precipitous increase" in margin use, Mary Schapiro, NASD vice chairman and president of regulatory policy and oversight, said her group wanted to alert investors to the risks of margin "and the consequences that can result." Some analysts see evidence of speculative stock trading reminiscent of the technology-fueled late-1990s bubble. The Standard & Poor's 500 index (CBOE:^SPX - News) has risen more than 25 percent since bottoming at 789 on March 12, while the Nasdaq (NasdaqSC:^IXIC - News) has surged nearly 50 percent since then, from 1253. "I don't think it's appropriate in 99 percent of the cases," said Wayne Zussman, a certified financial planner at Zussman Financial Advisors in Gaithersburg, Maryland. "People have been made more aware of the potential and risks of margin, but it remains very dangerous." For example, an investor buying $20,000 of stock, might put up $10,000 of his money, and borrow the rest on margin. If the stock falls 10 percent, the investor loses at least 20 percent -- $2,000, plus interest on the amount borrowed. The investor is responsible for losses on the $20,000 invested, not just the original $10,000. MAGNIFIED GAINS AND LOSSES With margin, an investor may lose more money than he has. That's one reason regulators require investors to put up the lesser of $2,000 or 100 percent of the purchase price in their accounts, known as "minimum margin," to trade stocks. The NASD said many investors underestimate the risks of margin trading. If the value of stock bought on margin falls below minimum levels, an investor must put up additional cash or face the sale of the investment, no matter the size of a loss. "As long investors have other assets they don't want to sell, such as real estate or bonds, a margin account might be OK to get their proper allocation of equities," said Zussman. "The risk is ... a cash call could force them to sell other assets, or they could be forced to (sell) some of their securities at an inappropriate time." Such mutual fund families as ProFunds and Rydex offer "leveraged" funds. These resemble buying securities on margin because they are designed to rise or fall faster than certain stocks or bonds. The difference is that investors don't borrow to invest. "The caution I would give investors is to understand the funds, and focus on both the upside potential and the potential downside risk," said Michael Sapir, president of ProFunds Advisors LLC in Bethesda, Maryland.