Make your own free website on Tripod.com

The difference between using cash and using margin:

  • If you invest in stocks just with the money you have in your brokerage account, you are using a cash account
  • If you borrow money from the brokerage to invest in stocks, you are using a margin account -- you do not pay in full for stocks that you buy or sell.
  • The collateral for borrowing the money is the marginable securities in your account, which means they are forfeit if you cannot pay the loan
  • You also have to pay a fixed amount of interest on the borrowed money on a monthly basis, which can reduce your overall returns
  • The risks associated with margin trading are also increased by leverage -- you lose twice as fast because there is less money backing the position.

I know, this sounds VERY risky.  And it is.  But here are some reasons why you would want to use margin:
  • To try to double your returns (or to double your losses)
  • The worst case scenario is when a stock price drops so much that it causes a "margin call," which means you either add more money to the account or you automatically get sold out of the position at a loss
  • Remember, higher risk is how higher return comes about.  You can take your chances on things working out and getting a huge return, or things not working out and you take a huge loss.

How to find out which stocks are marginable:
  • As a general rule, stocks selling below $5 are rarely marginable
  • Government regulations and brokerages dictate which stocks are marginable, so you may want to ask your broker for help here.

The skinny on initial and maintenance margin requirements:
  • The amount that you can borrow is regulated by the brokerage as well as the Federal Reserve Board
  • There are two requirements to this:
              1.  How much margin you can initially use
              2.  How much margin you can have after you make the initial transaction.

HOME | GETTING STARTED | WHAT IS A STOCK? | ANALYZING STOCKS | FORM AN INVESTMENT CLUB | DRIP INVESTING | GLOSSARY | HELPFUL LINKS | SOURCES UTILIZED | BRIEF OVERVIEW ON MUTUAL FUNDS