Tan Kin Lian's Blog: Top up on margin calls

Friday, November 21, 2008

Top up on margin calls

If you borrow money and pledge shares, the bank will check the prices each day. If the values of your holdings fall below the amount borrowed less a safety margin, the bank ask you to put in additional money. If you do not, you have to sell the shares at its depressed prices. This is called "margin call".

This causes the prices to fall further. As they are no buyers, the prices can drop a lot. This triggers more margin calls.

Solution: do not invest with borrowed money. Invest with long term savings.

5 comments:

ym said...: mr tan, i was just thinking abt a related issue...

i am not sure when ppl buy stocks on margin, if the money really exists or is it "fake" money...

if banks can print money out of thin air and the money goes into stocks, thereby pushing up the stocks, isnt this the reverse of naked short-selling?...

shouldnt this be illegal just like naked shorting??

how abt on contra?.. if there isnt money at the first place, isnt contra also the reverse of naked-shorting?...; November 21, 2008 9:04 AM
Anonymous said...: Data is avail to syndicate. They borrow shares from Owners and pay a fee, a short when they discover certain shares have higher Margin account deposited. Sync the right timing with Index fall, they sell down and flush Margin, then they buy back with another nominee account and transfer back to owners with a small fee.

ANother SMart financial actions that benefits only to the bankers, the rich and the Ugly.; November 21, 2008 2:00 PM
Anonymous said...: 2:00 PM,

If that is the case, the people who provide these info to the syndicate must be the bankers, since only they know how many people have ask them for a margin loan and the shares that are pledge to them.; November 21, 2008 4:19 PM
Anonymous said...: Contra - this is when you buy the shares and sell it within a certain time, 3 days. The gain or loss of the transaction are then calculated. Remember, in this case, you have to pay 2 times the commision, one for buy and another for sales.
But if you have the monies to pay for the share and you buy the share. Within 3 days, the share goes up, by say, 3%, then it is no harm to just contra it and make some pocket monies.
I have no interest in margin trading because I believe share market have to be play long term. I believed it is like that, you pay $10000 to buy share worth $100000 (ten times), If the share drop by 10%, your margin vanishes and if you want to hold on the share, you have to top up. while you are holding on to the share, you have to pay interest of $90000 that you borrowed.
Well, I donot suggest for anybody to play share using the margin trading, but if you are interested, you could refer to CFD from Phillips Securities.

HS; November 21, 2008 4:47 PM
Anonymous said...: The simply reasons of why Bank want to control securities firm and Insurance companies .

They have the money.
They need to control how you trade.
They also need to know your life...; November 22, 2008 5:34 AM