Marge is one of those things that novices find puzzling about the stock market, but the concept is actually quite simple. However, by understanding the basics of using margin accounts, determining the wisdom of using the margin can be quite a mystery.
A margin account is a traditional investment account with margin privileges.
This means that your broker has set representing a line of credit secured by stocks and bonds in your account. Often this margin credit used to buy into the same account more shares. But the bill can be borrowed against to buy real estate, make other types of investments, or just to pay personal accounts. The simple requirement is that sufficient power must be taken to maintain. Some value as collateral for the loan on the account
This is where the problem comes in. It's easy enough to maintain if all is well, that collateral level, but as the economy gets tough and you are strapped for cash, this is often the time that the market may fall. If the market goes down temporarily, your ability value decline, but the value of your debt does not change, you can get a "margin call" encounter when you can least afford it.
A margin call is similar to any other loan is called in. You must pay immediately. If you do not have the money, your stocks and bonds automatically sold to pay your debts. These compounds the problem: you end up selling your shares when they are down, usually the worst possible time. Remember, the idea is to buy when prices are down and sell when they are up. So, in addition to all other problems, the force margin loans to make. Poor investment movements In times of market crashes, a heavily margined account completely lost when the market falls only a negligible amount.
This leads to the idea of leverage, which is what represent margin accounts. Anytime you borrow to invest, you leverage your investment, or buying more than you can afford to have a fractional deposit. Because people buying stocks with borrowed money, or borrow against shares already held, this is the result. Buying a home with a mortgage is a very similar process, but since the bank does not usually call your loan if house prices dip temporarily, many of the problems mentioned above do not occur. Still, a 95% mortgage is a highly leveraged deal, and it's very easy to lose your entire investment with a small change in property prices. Even a typical 80% mortgage can wipe out the entire investment in a bad market.
Despite the many risks associated with margin or other forms of leverage, certainly there are benefits. Sure, we have the ability to lose emphasizes faster money, but you can also make money faster using these tools. If half of your power comes from the margin, you get money. Twice as fast The stock go up, your profit aggravated because you yourself twice as many shares as you would normally afford. Thusly, when the market goes down, you lose twice as fast.
Also, some people can benefit by simply having a margin line of credit is available, without making use of it at all, or by using only to be used for the short-term sales. If used judiciously by a disciplined investor, there is virtually no risk in having access to a margin account. It is the use of the bonds to bear the costs. Imagine a credit card that is never used, but the credit is available in the event of major emergencies.
In the end, Leverage simply means that your gains or losses will be multiplied. Each investor must consider him / herself the acceptable level of risk. But we are convinced that there are other risks that provide better payouts than simple use of leverage. While it is good for most investors have access to margin, it may not be wise to use often. Besides interest costs, the additional risks end up causing more harm than good.
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Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide range of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally and in the U.S.
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