Just Pay For the Stock You Buy
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
When you borrow money to buy a car you pay back what you borrowed, plus an interest charge. This is the same with marginal stock. You are borrowing part (usually around 80%) of the stock price from the broker. For this service the broker will charge you interest. If you buy a $100 stock you give the broker $20 and borrow $80. You then pay interest on that $80 until you sell. So theoretically, If the stock goes up to $150 you must give the broker back their $80 plus the interest for the time you held the stock. The great part in using margin (if the stock goes up) is making a $20 investment you have gotten your $20 back plus a $50 profit minus whatever interest is due. Many day traders use this method to make a lot of money by buying and selling stocks quickly – sometimes buying in the morning and selling in the afternoon – hence day trading.
The Real Magic Is Knowing What Stock 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
It comes down to your mindset when it comes to risk. If you will get ulcers worrying about the money you owe on margin it might be a good idea to stay out of the market all together, or buy mutual funds and let someone else worry about the return. Paying cash leaves you in a more flexible position while the margin gives you greater potential. The most important thing is to do your research and invest with your head not your heart.
Richard Moran is a Financial Consultant and writer for Money Helpers. The Blog contains 100′s of articles, charts, and calculators to assist you in your financial well-being. All the parts of the Blog are free and it is updated on an almost daily basis. If you are searching for any financial aids or products they can be found on Money Helpers.
