Margin
Margin is credit or a loan applied to the brokerage account. The purpose of margin is to allow you to purchase securities on credit. The securities are the collateral for the loan. Thus, if the purchased securities drop in value you may get a margin call. The margin call is when the margin loan people ask you to deposit more monies so that their risk is reduced. The use of margin can make a tidal wave of selling. The reasons for the selling is that many people must sell additional stock to cover margin calls during a bear market. The additional sells magnify the market downturn. Margin is a tool that magnifies both the upside and the downside of any market. Margin should be used intelligently and cautiously. Many people have got their finances in trouble by buying too much margin on a “sure thing” that didn't work out. Our philosophy is to stay out of debt. If you can't afford a security, don't buy it. The risks are not worth it and there is no sure thing. In some rare cases, margin can be used as a great tool. However, it should be emphasized that it should be used cautiously and intelligently. I have seen some clients use margin to buy T-Bills that pay a higher rate than the margin rate. Some of these guys were making a lot of money and the risk for T-Bills is minimal. That is what I call a good use of margin. Regular stock speculation isn't a good use of margin.
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