|
|
What is buying stock on margin?
Question
#104045. Asked by dj168. (Mar 22 09 1:10 AM)
|
author
|
Margin buying is buying securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, i.e. the difference between the value of the securities and the loan, is initially equal to the amount of one's own cash used. This difference has to stay above a minimum margin requirement. This is to protect the broker against a fall in the value of the securities to the point that they no longer cover the loan.
In the 1920s, margin requirements were loose. In other words, brokers required investors to put in very little of their own money. Whereas today, the Federal Reserve's margin requirement limits debt to 50 percent, during the 1920s leverage rates of up to 90 percent debt were not uncommon. This was one of the major contributing factors which led to the Stock Market Crash of 1929, which in turn contributed to the Great Depression.
 http://en.wikipedia.org/wiki/Margin_(finance)
|
queproblema
|
All of this is very well and good until a "margin call" goes out. It's a little too long to paste in here, so click for Investopedia which not only explains it but creates a little scenario.
http://www.investopedia.com/university/margin/margin2.asp
First time I heard of this was in the 1987 crash. Happened to be listening to talk radio in LA and called in to George Putnam, who did a great job of explaining it to me. I was hoping none of my friends were listening to my uninformed questions!
http://en.wikipedia.org/wiki/George_Putnam_(newsman)
|
Find something useful here? Please help us spread the word about FunTrivia. Recommend this page below!
|
Sign up to see all responses!
