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Margin Acct. vs Cash Acct.

Posted by Bruce Kahl on October 04, 2004

In Reply to: Marginal gains posted by abe on October 04, 2004

: : : : : : :
: : : : : : : Need help:

: : : : : : : The terms of the deal will change on the margins.

: : : : : : : What does "change on the margins" mean here?
: : : : : : : Thanks!

: : : : : : On the periphery - the minor details, not central to the deal, will change.

: : : : : : DFG

: : : : : If I may say so, I believe an American would use the word "marginally" instead of "on the margins". The latter sounds distinctly British to me.

: : : : I agree it is in British use - I hadn't realised that it would not be used in the US(?)

: : : : DFG

: : : "terms of the deal" leads me to believe that we are not metaphorically speaking of paper margins/periphery. I don't know much about the stock market, but I know stock is purchased on "margins", or "margined". These margins fluctuate. Perhaps, someone with more knowledge on the subject would elaborate.

: : Margin trading is a way to increase the gearing (leverage) of your investments. You can magnify the profits from a deal, but also any losses!

: : "Margin trading facilities are currently available for the top 350 UK shares, over 500 leading US shares and several hundred major European shares. Margin trading has substantial advantages over normal share dealing:

: : Gearing; You can take a position in a stock without having to put up the full contract value. Instead, you put up a margin deposit as collateral. The margin is normally around 10% of the contract value."

: It sounds like a (sort of, perhaps actually) technical term in investments to me. Perhaps the context would indicate differently.

Buying on margin is just buying on credit.

If you have a good credit rating you can use your broker's money to buy things instead of your own.

This is different from a regular cash account in which you trade using YOUR money in the account.

Let's say you deposit $10,000 in your margin account. Because you put up 50% of the purchase price, this means you have $20,000 worth of buying power. Then, if you buy $5,000 worth of stock, you still have $15,000 in buying power remaining. You have enough cash to cover this transaction and thus haven't tapped into your margin. You start borrowing the money only when you buy securities worth over $10,000.

Like any loan you need to pay interest.

Additionaly, if the value of your investments decline then you have to kick in some more of YOUR cash. This is known as a "margin call" and can lead to a cascade of selling a la 1929 or 1987.

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