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.

Technology Stocks : WAVX Anyone? -- Ignore unavailable to you. Want to Upgrade?

To: Richard Bunker who wrote (5697)	2/25/1999 10:58:00 PM
From: SlateColt	Read Replies (2) \| Respond to of 11417

Margin No-no's All this margin talk is scaring me. Don't EVER use margin to buy the same stock you're using as your margin equity. Sure, its great when the stock climbs, but if it falls, you'll implode. A simple illustration follows: Fred owns 10,000 shares of WAVX at $10/share (equity=$100,000) Fred's broker has a 50% margin requirement which equals $50,000 Fred buys 5,000 addtl ($50,000) shares on margin (now maxed out) Scenario 1 ------------------------------- WAVX drops to $8 a share Fred's equity drops to $80,000 and now may borrow only $40,000 Fred has borrowed $50,000, so he gets a margin call for $10,000 Fred must deposit $10,000 or sell 1,250 shares of WAVX If Fred cashed out now, his holdings would be worth $70,000. If Fred never bought on margin, his holdings would be worth $80,000. Not bad you say? Only a difference of 12.5%, right? Scenario 2 ------------------------------- WAVX drops to $6 a share Fred's equity drops to $60,000 and now may borrow only $30,000 Fred has borrowed $50,000, so he gets a margin call for $20,000 Fred must deposit $20,000 or sell 3,333 shares of WAVX Fred doesn't have the cash, so he sells 3,333 shares WAVX rises to $10 a share 3 days later Fred using margin: his holdings would be worth $86,700. Fred not using margin: his holdings would be worth $100,000. Moral: Fred lost $14,000 and WAVX is at the same price when Fred bought it. Greed cost Fred bad, 14% of his original investment for a net-zero move in stock price. Scenario 3 ------------------------------- WAVX drops to $4 a share (student exercise) Take it from someone who has been there, don't be a Fred. Just remember when the bubble breaks, it doesn't take long before it makes a wet spot. ---Slate