anonymous
  • anonymous
why was buying on margin a big risk for american investors?
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jamiebookeater
  • jamiebookeater
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anonymous
  • anonymous
because you have to pay a margin call if your put comes up?
anonymous
  • anonymous
Buying on margin allows a person to essentially borrow money to buy stock. It may also refer to borrowing money to make other, more complex investments, but in all cases the result is that if the investment goes well the person borrowing money can make more money than they otherwise could. On the flip side, and why this practice is such a big risk is that it allows you to loose more money than you actually have, being all your money + all the money you borrowed in the worst case. You could also draw pretty clear similarities between the practice of buying stock on margin in the stock market bubble of the 1920's preceding the great depression and getting a no money down mortgage on a house much larger than you could really afford during the last real estate boom. Both are buying an inflated asset with borrowed money. As long as you can flip the house before the bottom falls out you are golden...if not...

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