Fact or Fiction: Can You Lose It All on a Margin Call?

Staff

If you open a margin account with your broker, you can buy twice as much stock as you actually have the cash to purchase.

The limit for buying stock on margin is 50 percent -- you need to pay for at least half of the stock you buy and you can purchase the other 50 percent on margin.

You can invest any amount of money into a margin account.

Federal regulations require a minimum investment of $2,000 in margin accounts, and most brokers require more.

Buying stock on margin is like buying it with a credit card.

While there are some similarities (paying interest, for example), credit debt is unsecured debt. There's no collateral; stock bought on margin is secured by the stocks you paid for in cash.

When a stock purchased on margin loses value, the loss comes out of your collateral stock first.

The overall value of your stocks will be falling even as the dollar amount you owe your broker for loaning you the stocks stays the same.

The 25 percent maintenance minimum set by federal regulations is universal among brokers.

Brokers can set any maintenance minimum they want, as long as it's 25 percent or higher. If their analysis shows a stock is likely to lose value, they can set a maintenance minimum of 40, 50, even 75 percent -- whatever they feel minimizes their financial risk.

If you fall below your maintenance minimum and your broker issues a margin call, federal law requires that they give you 48 hours to meet the minimum by selling stock or depositing cash.

Your broker can "sell you out" at any time if you're below the maintenance minimum. The farther you get from the minimum, the more likely this is to occur.

Buying stocks on margin is a good idea if you prefer to make infrequent trades and don't spend much time constantly watching your stock prices.

Margin stocks require some attention to minimize losses, generally on a day-to-day basis. You need to watch out for stock declines so you can sell before a margin call leads to financial disaster.

If your margin stocks fall enough in value, you could actually end up owing your broker money.

If the stock loses enough value, when your broker sells off the shares, the proceeds might not be enough to cover the cost of the loaned stocks. You'll owe for whatever remains unpaid.

In 2008, a CEO lost almost half a billion dollars on a margin call.

The CEO of Chesapeake Energy in Oklahoma City suffered a massive loss when his stock, purchased on margin, fell in value.

Buying on margin is a relatively advanced investment strategy not suited for stock market beginners.

Investments always carry inherent risks, but investing on margin is even more risky.

You can purchase any stock on margin.

If a broker thinks a stock is too volatile, instead of requiring a high maintenance minimum, the broker may simply not offer that stock for purchase on margin at all.

Margin calls are issued via registered mail or courier.

Margin calls are typically issued via a simple phone call or e-mail, or a notification in your account with the broker's Web site.

If you have stocks worth $10,000, bought on margin with $5,000 in cash, you'll have no equity if the stock's value falls 50 percent.

The loss in value ($5,000) comes out of your equity ($5,000), leaving you with no equity, and still owing your broker for the other $5,000. You'll have to sell off your shares at their reduced value to pay off the loan and meet the account's maintenance minimum.

You can control when your broker sells off your shares after a margin call.

Your broker will sell your shares off in a way that minimizes their financial risk, not necessarily in a way that works to your advantage.

If a stock bought on margin increases in value and you sell it, some portion of the profit will be used to repay the broker's loan.

The stock loaned to you by the broker will be paid for at the original value. Since you sold them at the new, higher value, you can make a lot more money this way.

As long as a stock bought on margin neither gains nor loses value, you should hold onto it, since you aren't losing anything.

You pay interest on the stocks loaned to you by the broker -- and this can really add up. A stagnant stock is not a good candidate for buying on margin.

The minimum amount of cash needed to buy a stock on margin, usually 50 percent, is regulated by the Federal Reserve Board's Regulation T.

Regulation T does set different minimum initial margin rates for some stocks, but in general it's 50 percent.

It's safe to put all of your savings into a margin stock as long as you're confident it will increase in value.

It's very important to have cash reserves ready to meet margin calls. It doesn't matter how confident you are in a stock's rise, the market can be very unpredictable.

Stock dividends should never be taken into account when calculating profit from margin stocks.

Stocks that pay decent dividends are good candidates for margin investments because the dividends can make up the interest on the margin, increasing overall profit (as long as the stock rises in value).

If your stocks bought on margin fall in value, you can wait out the market until they rise again.

This is the true risk of buying on margin -- if you can't make a margin call, your broker will sell off the stocks when they're worth the least. You lose the option of holding them until they bounce back.

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About This Quiz

Buying stocks on margin is a way to maximize profits when stock prices rise, but it's a risky move that can wipe your portfolio clean. Take this quiz to see exactly how you can go broke on a margin call.

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