Stock Margins Can Make or Lose You A Lot of Money

By Richard Moran

You can use someone else's money to leverage your capital for stock purchases. That is buying on margin and is the same as buying other things on credit. The difference comes to the control you have over your investment - with the stock market you are at the whims of the day-to-day market fluctuations. Many of the recent financial problems drove the market down and therefore lost money for those who held their stock on margin. These circumstances left many stocks at all time slows.

Buying Stock Outright

Cash is still the best way to purchase any investment. Buying stock on margins will necessitate the price of the stock rising enough to not only cover your cost and fees, but enough to cover the interest charges imposed by the stock firm offering the margin purchase. Unless your crystal ball is a good one, and your stock picks take off, that is a lot of pressure for the stocks price to rise. Of course if the price falls you are still responsible for that loss plus any interest due on the original purchase price. You may owe quite a bit more than the stock is worth when you sell.

Buying on Margin

When you buy stocks on margin, you are requesting a loan for the money to purchase those stocks. In return for the loan from the brokerage firm, you will pay interest on that loan. The brokerage firm is virtually making money on your loan and will hold your stocks as collateral against the loan. If you do not pay the firm back, they sell the stocks. In short they have little risk involved in loaning you the money for the stocks. On the other hand, you have to see to it that the stocks you select make enough in profits to not only put money in your pocket but to pay the loan back to the brokerage firm.

Knowing the Stocks you Buy

If your interested in margins the best advice is to know your stocks. One bad bet can cost a lost of money. Conversely, it can make you a bundle. History can help with a stocks' rises and falls but circumstances of a particular day can affect a solid stock to a great extent. Think what would happen to the health insurance provider's stock if the government announced universal health care for the citizens of the United States. Everything affects the stock prices - politics, weather, the moods of the people. When a few of the banks borrowed from the government most bank stock whet down, even if they were not borrowers from the fed.

Margin/Cash - so which is the best way?

It comes down to your mindset when it comes to risk. If you will get ulcers worrying about the money you owe on margin it might be a good idea to stay out of the market all together, or buy mutual funds and let someone else worry about the return. Paying cash leaves you in a more flexible position while the margin gives you greater potential. The most important thing is to do your research and invest with your head not your heart. - 23210

About the Author:

Richard Moran is a Financial Consultant and writer for Money Helpers. The Blog contains 100's of articles, charts, and calculators to assist you in your financial well-being. All the parts of the Blog are free and it is updated on an almost daily basis. If you are looking for any financial aids or products they can be found on Money Helpers.