| When investing in the stock market, you have an | | | | You will be asked to put up more cash into the |
| option opening a cash account or a margin account. | | | | account to carry the stocks. If you don't by the |
| A cash account is one you pay for your stock | | | | dateline, usually within 3 days, your account will be |
| purchases in full with cash. A margin account lets you | | | | liquidated. The broker will sell your stocks in the open |
| buy stocks with borrowed money from the broker | | | | market to redeem his margin - money you borrowed |
| you are trading with. This comes at a cost, | | | | him. This doesn't discount if several days later stock |
| advantages, disadvantages and horrific consequences. | | | | recover and starts to move back up again. |
| The advantage of buying stocks with margin is the | | | | During the roaring 20s, the margin requirement was |
| leverage. Under current rules and regulations, | | | | very loose. Investors leveraged themselves to the |
| investors can margin himself to 50%. This means a 2 | | | | hills. Some borrowed to 90% of stock value, much |
| to 1 leverage. For every dollar in upwards move of | | | | like today real estate speculation. The market was |
| stock, you would double the profit. | | | | overheat and bubble was blown up under no financial |
| However, leverage can be a double-edged sword. For | | | | strength of the company at all. |
| every dollar in downwards move of stock, your loss | | | | Everyone wanted to make quick bucks. When the |
| would be doubled too. Suppose you borrow 50% of | | | | market finally turned south, panic selling set. Most |
| the stock purchases and the stock price gets cut in | | | | investors couldn't put up cash and margin calls echo all |
| half in a crash, you will contact with a fairly nasty | | | | over in the market. And this ignited the Great |
| message. | | | | Depression of the 1930s. |