Thursday, November 20, 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.