Is Margin The Best Way To Make Money With Stocks?
Some people who invest into the stock market use other peoples money to purchase those stocks. It is called buying on margin and is equivalent to purchasing a home on credit. The main difference between the two is you can improve your homes value by updating and remodeling and you rely solely on the stock market in order to pay off your loan on marginal stock purchases. The recent stock market problems were caused in part by marginal stock holders whose investors became nervous and demanded their money before the stocks could make a profit. This drove the price of these stocks to all time lows.
Just Pay For the Stock You Buy
When you buy stocks outright you pay for your stocks at the time you purchase them. For example, you may purchase one hundred shares of stock at fifty dollars per share costing you five thousand dollars. It is over and done, you own the stocks, and they are free to earn you the money instead of earning someone else money. Since most brokerage firms require you to have a minimum equity of two thousand dollars to begin with before buying on margin, it simply makes sense to drop the number of shares you purchase and own them outright.
You Know It’s a Sure Thing and Want 10,000 shares rather than 1,000
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.
Regardless of How You Pay You Still Must Know What Stocks 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.
On Margin or Outright
Basically, buy with cash if you can. When a special situation arises where you are sure of the stock health and “know” it will rise buying on margin can net you some super profits without a big cash outlay. You will of course still be limited by the equity you have in your brokerage account. Unless you are wealthy, or have great credit at a bank they won’t lend you money to buy a stock so the broker is normally the only avenue available. Another “trick” used by savvy investors is to use the 7 day payment period used by most brokers. You can buy the stock today and wait a few days to pay, or just sell it before the payment is due. Then any profit is yours without interest – that is if the stock goes up. If the price falls the purchase price is still due, so be sure you have a backup if you are using this plan.
Richard Moran is a Financial Consultant and maven for Money Helpers. The site contains 100’s of articles, charts, and calculators to aid you in your financial well-being. All the parts of the site are free and it is updated on an almost daily basis. If you are searching for any financial information or products they can be found on Money Helpers.