Should I Be Buying Stocks On Margin ?

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.

Just Pay For the Stock You Buy

When you initially open a brokerage account most stock firms will make you pay for your initial purchase. Most require a minimum equity of $2000 before they will even discuss any margin purchases. Remember unless you are paying cash there will be interest charges due on any stock you buy on margin. Therefore, in order to make a profit not only does the stock have to go up in value enough to cover your investment and the firms charges, but you will also have to cover the interest you have paid over the time you have owned the shares. Most times unless you are a market maven you will come out way ahead using cash to purchase your stock.

Using A Brokers' Margin System

When you borrow money to buy a car you pay back what you borrowed, plus an interest charge. This is the same with marginal stock. You are borrowing part (usually around 80%) of the stock price from the broker. For this service the broker will charge you interest. If you buy a $100 stock you give the broker $20 and borrow $80. You then pay interest on that $80 until you sell. So theoretically, If the stock goes up to $150 you must give the broker back their $80 plus the interest for the time you held the stock. The great part in using margin (if the stock goes up) is making a $20 investment you have gotten your $20 back plus a $50 profit minus whatever interest is due. Many day traders use this method to make a lot of money by buying and selling stocks quickly - sometimes buying in the morning and selling in the afternoon - hence day trading.

The Real Magic Is Knowing What Stock To 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. - 23159

About the Author:

Richard Moran is a Financial Consultant and writer for Money Helpers. The site contains hundreds of articles, charts, and calculators to assist you in your financial health. All the aspects of the site are free and it is updated on an almost daily basis. If you are looking for any financial information or products they can be found on Money Helpers.