Chingo De Dinero

Recently I found an investment that I could not turn down First Cash Financial Services (FCFS) at 16.15. Not only did I sell all of my other investments, I also borrowed money to buy more. This brings me to the subject of buying on margins, which is the term for borrowing money from your broker to buy stock. You use your current stocks as collateral for the purchases, allowing you to buy more stock than you would have thought before.

For example, if you put $1,000 into an account and have initial margins of 50%, you can purchase $2,000 in stocks. You then will have another limit for margin, maintenance margin, typically 25%, meaning at all time, you must have 25% equity. So, continuing with the example, original purchase of stock drops from $2,000 to $1,335 (equity 335/ total value 1335).

To ensure that you maintain the “maintenance margin” your broker will conduct a margin call, when you start getting close (I have never gotten one and hope to never). A margin call actually involves a call, where your broker will ask you if you are going to deposit more funds into the account, to increase your equity, or if they need to sell some of you stocks, to reduce the debt levels. If they can not get a hold of you, and it drops to the maintenance margin limit, your broker will sell. There is no way around it, it is a NYSE and NASDAQ requirement.

Another bit of info that is needed to understand margins is that you must pay interest, while you borrow the money. Currently, I am paying around 10%, too high if you ask me. Since the cost is so high I rarely use margins, only at times like this, when I think there will be a drastic change in stock price in a short period of time.

I have talked a lot about the negatives of margins, mainly because they can be very dangerous, but there are some good positives as well. For example, if a stock moves from $10 to $20 and you have $1,000. Plan A, you purchase 100 shares, making $1,000. If you use margins, you can purchase 200 shares, making $2,000 (less interest), almost doubling your profit.