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Margin
by WealthEffect Staff
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Margin is borrowed money
 
  Margin turns investments into speculations  
  Don't buy stocks on margin  
 
1.

If you buy 100 shares of a stock selling at 50, it will cost you $5000. Or, if you want, you can buy the shares on margin — your broker will lend you up to half the cost and you only need to put up is $2500. If the stock rises, your percentage gain will be higher than if you had put up the entire cost without borrowing.

If the stock price declines, however, you will still owe that $2500 plus interest. Along the way, you will receive margin calls from your broker, warning you to put up more money or your holdings will be sold. Should the price fall by half, your original stake will be wiped out.

 
 
2.

Even the greatest companies have seen their stock prices decline by 50% or more. These declines, which should be buying opportunities, become nightmares for those on margin.

Simply put, margin turns investments into speculations. You might own great companies and be willing to hold them for the long term, but margin can clean you out at any time. Time is no longer on your side.

 
 
3.

Invest what you can afford. Take comfort in the knowledge that, although great companies might see their stock prices decline by half, these prices will never go to zero. As long as you stay in the running, you will eventually win.

Suggestion: Go to Risk