Borrowing Money to Buy Stock Traps
In the past few weeks, stock market volatility and declining trends have led traders and investors alike to lose very large amounts of money, let alone sleep.
For those traders who are ready for this possibility, they lose very little. They would lose 5-10%, while the average trader would lose around 20% if not more.
The average investor is drawn to the final "bull run", like a moth to a flame. There are unrealistic expectations of the currency, they also affected by the media hype, which is prevalent in the high stock market.
"Taste of the month" for a certain period of time It is margin loan. They are easy to set up. File work is minimal because setup costs. So you can run in less than a .fortnight time.
The average borrowing is usually around $ 100,000,000, and the potential trader has to make a fifth. In this case, $ 20,000. But you can buy the full amount of the loan, ie $ 100 000 in stock. This is called leverage.
Now leverage is a double-edged sword, you can earn good profits, but you can also have Large losses.
Average Investor Determines Margin Loan for "Sure Fire" Assurance Fast-Earned Methods There is no need for experience or knowledge to cope with a sudden drop in the stock market.
Taking the recent downturn in the market as an example, stock prices have plummeted in at least 20% of the region. Investors who hold about $ 100,000 in margin loans suddenly lose $ 20,000
When this happens, they are placed in a dilemma of getting more money (this is called an additional margin.) Or buy more Many stocks. In many cases they are lent to the handle, and they can not do it.
Therefore, their shares must be sold at a loss, which only exacerbates the problem because other traders have to sell their shares on the same ship. With a large number of stocks hit the market at once, this power to further decline in stock prices. Leading to more panic selling.
In some extreme cases, investors simply do not have a stock portfolio and still owe their margin loans.
So what precautions should be taken by the investor or trader to ensure that the losses can be kept to a minimum in the event of a market downturn?
The first thing to remember, your only security is the shares themselves. You must maintain a margin between the amount you are borrowing and the current value of the stock
This is called your "loan assessment rate" or LVR
If the market is below your LVR, then you have Choose to invest more money or buy more stocks. Let your LVR come back again. Of course, if you can not do it, then your lender will force you to sell all or part of the stock portfolio.
Having a diversified portfolio covering several areas is a good idea as it is always one area to hit the worst.