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.
Cash is still king when it comes to purchasing stock
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.
Using A Brokers' Margin System
In the margin situation the brokerage house is basically acting as a bank and loaning you the money to purchase the stock. All this is done only on paper of course. If for any reason you don't keep up with the interest payments the broker merely will take the ownership of the stock back, and you may still owe them money, even if the stock did go up. There is very little risk for the brokerage, although many did lose a lot of money in the recent stock market crash. However, even with that most of the money lost was not from marginal stocks but from more exotic forms of investment.
Regardless of How You Pay You Still Must Know What Stocks To Buy
One way of ensuring you can pay back the loan on your investments is to know your stocks. You should study your stocks before making a purchase. It is important to know how they have been effected by other aspects of the market, how often they drop, how long they remain on a rise and what the average rise for them is. By studying the stocks you want to invest in, you may find that you dont need to borrow money in order to invest.
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. - 23309
Cash is still king when it comes to purchasing stock
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.
Using A Brokers' Margin System
In the margin situation the brokerage house is basically acting as a bank and loaning you the money to purchase the stock. All this is done only on paper of course. If for any reason you don't keep up with the interest payments the broker merely will take the ownership of the stock back, and you may still owe them money, even if the stock did go up. There is very little risk for the brokerage, although many did lose a lot of money in the recent stock market crash. However, even with that most of the money lost was not from marginal stocks but from more exotic forms of investment.
Regardless of How You Pay You Still Must Know What Stocks To Buy
One way of ensuring you can pay back the loan on your investments is to know your stocks. You should study your stocks before making a purchase. It is important to know how they have been effected by other aspects of the market, how often they drop, how long they remain on a rise and what the average rise for them is. By studying the stocks you want to invest in, you may find that you dont need to borrow money in order to invest.
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. - 23309
About the Author:
Richard Moran is a Financial Consultant and writer for Money Helpers. The site contains 100's of articles, charts, and calculators to assist you in your financial well-being. All the aspects 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.
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