Name: Margin Trading from A to Z: A Complete Guide to Borrowing, Investing and Regulation
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Margin Trading from A to Z offers a step-by-step explanation of the mechanics of the margin account. Filled with in-depth insights and expert advice, this book uses a hands-on approach to show how a Regulation T Margin Call is arrived at; how it may be answered; and how an account looks once a call is issued and after the call is met. Other items covered by this detailed guide include minimum maintenance requirements, short selling, memorandum accounts, options, hedge funds, and portfolio margining. The book includes quiz questions and a comprehensive exam.

Author’s Introduction:

Trading on margin has taken an unfair and unwarranted amount of abuse. Purchasing securities on margin is nothing more than purchasing securities on credit. Credit is not evil or bad and, if properly used, can be an extremely proﬁtable means of investing. If I told you that I had just purchased a house and paid for it in full, I am sure you would be surprised, because this is not the normal procedure for purchasing a house. Most people react to this statement by saying that (1) a house is a huge purchase requiring ﬁnancing (true) and (2) there is no risk—real estate always increases in value (false).

I would be negligent not to tell you that any credit purchase of stocks, bonds, real estate, furniture, ﬁxtures, and so on involves a degree of risk. However, a cash purchase in full of the same items involves the same degree of risk. The value of items purchased, whether ﬁnanced or paid for in full, can decline, giving you a loss. Real estate prices have dropped substantially in certain geographical areas, areas that have experienced a decline in jobs and increased unemployment; a decline in real estate value usually accompanies it. The real estate decline affected houses being ﬁnanced with a mortgage as well as those that were fully paid.

The ﬁrst false notion one must discard is the idea that debt is bad. It is not. Borrowed funds used properly can result in considerable proﬁts. The term leveraged buyout is very popular right now on Wall Street. It is nothing more than one company taking over another company with borrowed funds. Our economy and our standard of living as we know it today would not exist without credit. The obvious fact in purchasing securities on credit, with the current requirements at 50 percent, is that one can purchase twice as much in a margin account as in a cash account.

Consequently, if one purchases $10,000 worth of securities in a cash account and that security doubles in value, one has a proﬁt of $10,000. The same $10,000 in a margin account enables one to purchase $20,000 in securities. Should these securities double in value, the proﬁt is $20,000. That, in essence, is the principle behind margin trading. Often, the complaint is voiced that an additional expense is involved in margin trading, because the broker charges interest on the money he or she is ﬁnancing. And that is absolutely true. However, since one can purchase twice as many securities, twice as many dividends are available to offset a good portion of the interest charged.

A margin account can also be used to obtain ﬁnancing for purposes other than buying and selling securities. Assume a customer has $60,000 in market value of listed securities and wants to buy a new car with a total sticker price of $27,000. Depositing these securities into a margin account, the broker is permitted to ﬁnance 50 percent, or $30,000. In this case, the customer has purchased his or her car and still maintained ownership of the securities. Interest charged by the broker is approximately the same as that charged by a bank for an auto loan. The advantage of the margin account is that the client does not have to make monthly payments to pay off the loan. The loan may be paid off at any time or can stay open indeﬁnitely, provided the collateral is sufﬁcient to meet the minimum maintenance requirement (this is discussed in detail in the text). In addition, the bank loan requires the automobile as collateral. The bank can thus dictate what kind of insurance must be purchased, whether alarms must be installed, and so on. However, with the margin account the loan is tied to the securities deposited and has nothing to do with the car.