David John MarottaDavid John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
Host: What is investing on margin?
David Marotta: Investing on margin means that you don t quite have enough money to buy all the things that you are buying. Back in the 1920 s and the 1930 s you used to be able to use your stocks as a loan to buy more stocks. So, you might buy a $100 worth of a stock and then you might only have 5% and you might borrow 95% of the value against your stocks. Now, you buy another $95 and then you use those stocks to buy another.
So, the problem is, with very little money you can get a huge portfolio. Now, in the 1920 s when the markets were going up that was great. In 1929 the whole thing fell apart and a lot of people ended up owing money on margin and they didn t have any stock value to end up supporting it. So, nowadays, the margin calls are listed at 50% and you have to have, you can only borrow about 50% of a value of your portfolio. If your portfolio goes below, if your margin goes above 50%, then they have a margin call and you have so much time that you need to sell something in order to satisfy that loan. We don t recommend investing on margin.