Buying on Margin
There is a lot to say about trading in margin, and there is a lot already said about that. But in never be too much because these lesson are always tend to be forgotten. And investors do the same mistakes again and again. Why is that will you ask, well the answer is very simple. The greed. Greed makes financial markets the way they are now. And don't be surprised, because they are completely normal.
Well buying on margin from the first look doesn't seem to a lot different than regular investing, but this may be wrong impression, because it is not just little bit riskier but it is pure speculation. The thing about buying on margin is that financial leverage is used, and that means borrowed money are used.
If borrowed capital is used it means not only that interest must be paid but the worst is that investors who is investing in stocks (normally stocks are bought on margin more common that other investments) do not control the situation any more. He does not control the investment portfolio because investment market do it for him. He is just a play doll of the market since started buying on margin.
Margin Call
Why investor does not control the situation any more since buying on margin? Because any time he can get the margin call. Yes, the margin call for a stock trader. Does not sound very pleasantly? That means you already have heard of it. Especially if you would have received already such margin call you could not say about this one any good.
Margin call is a provided by the investment bank or broker to the client, when he has to say that client needs more funds or sell some securities. Or maybe all of them, who knows, it depends on the situation of financial markets. But one thing is for sure, that margin call or financial market now controls the situation. Because if market falls down, investor might forced to sell all the securities in his portfolio.
Stock Market Crash
It will be not that bad if investor is investing in flat times or when markets are decreasing slowly if he is buying stocks on margin. But things may get much worse if he will suffer big fall or real stock market crash. Not every market decrease is very painful, but stock market crash is situation in the market when the decreases in value are very sharp and very sudden. And worst thing that can happen at investing is to be buying on margin during stock market fall.
If the crash will be very strong the you will necessary receive the margin call and this one will be unforgettable one for you. You won't be happy about it for sure. Because most probably you won't have free funds to add and you will be forced to sell yours stocks at low prices. Nobody wants that, but you won't control the situation anymore, because the Mrs. Market does that for you now. Relax and give up, the best you can do.
If market will continue to fall, you may be forced to sell all securities of yours. You might left with a zero of capital, or even worse - with a debt to buying on margin service provider. That is the margin call during stocks market crash. I wish you not to experience that, and never twice!
