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CalCarp

Did you know the Fed Gov allows stocks to be bought "on credit"? ..isn't that crazy?? (..LOL!)

Hey, ..I'm just a guy with a hammer and nail..But I see there is this thing called "stock margin requirement" (Reg T, c.1974) that says "investors" (LOL!) "must be able to put up at least 50% of the money for any stocks they purchase". Hah!!!!Are you kidding me?? ..Let's say some company needs money, ..and they can't get it from a bank, probably because the ongoing concern just doesn't look "viable", ..but they are allowed to sell stock shares (..raise "capital") from people who don't even have enough money to buy those shares, ..who can't actually put up the money that those companies are now going to go out and spend!!Wall Street calls that "leverage". How's Wall Street doing these days?
CalCarp:

btw: the "c. 1974" apparently referred to a time-point from which the "50% in cash" margin set-point has remained unchanged. The Regulation T rule has been a part of our codes for much longer ( ..from back in the depression 30's?)
Before 1974, that margin requirement is said to have ranged from a low of about 40% (must be paid in cash) ..to a high of about a 70% margin (70% needs to be paid in cash)
There are people on both sides of the argument about whether or not the percentage that is required to be paid by cash (..not bought on credit) makes a difference on the total quantity of stocks and bonds sold that year.
A higher amount of these securities being purchased and held, would raise the Dow Jones numbers.
Of course, if many WERE being bought on credit, and the DJIA went very high (e.g., 14,000 pts.) that might promote a massive "sell off" to try and capitalize on the high share prices (..to repay the "credit", and net a profit).
Was there a recent, and sudden rush to sell?

Ginger:

Most of us use credit. We buy our cars with credit. We buy our homes with credit. We send our children to college with credit. That is leverage. Yes, investors also use credit. and they make a 50% down payment. If their investment drops in value, they are required to put up even more (margin call). Is it wrong for investors to have access to credit? This country was built on credit. Credit is now hard to come by and the economy is suffering as a result.

CalCarp:

"Credit is now hard to come by and the economy is suffering as a result"
Exactly!! ..it is called "over extension of credit", ..it is a BAD thing!!
Credit did NOT "build America", ..neither George Washington, nor Abraham Lincoln, owned a credit card.
(..And no one builds a house if they only have half the lumber!)

CalCarp:

..but more importantly, ..it is assumed (..should be!) that we are "investing" our MONEY, ..not taking a gamble using credit cards!
If you do not HAVE a surplus of money, ..if you have not done that well in your financial decisions and activities, ..what is it you are "contributing" to the economy with your "stock pick", ..on credit?
Can I buy a 3,000 Lotto tickets on one of those bulk-mail credit cards?
Will I be helping to "build America"?

Ginger:

George Washington and Abraham Lincoln did not build this country. Come to think of it, Lincoln did a pretty good job of burning down the southern half.

This country was built by entrepreneurs and investors and the workers whose jobs their investment and their leverage made possible.

Do you think that the railroads were paid for before they were built and put into operation. How about our communications systems, our factories. Investors made it possible. Investors with leverage. Vanderbilt, Edison, Westinghouse, Carnegie, Ford, etc., etc.

When you buy a stock, you are buying a partnership in a business: not a lottery ticket. Surely you know the difference.

CalCarp:

..and in fact: Earlier this year, the DJIA was up over 14,000 pts. right?
Just imagine if half of that "investment" was just an unsupported credit "bubble".
If that bubble were to have "burst" (..hasn't it?) ..how far down would that DJIA have to sink to find "firm ground"? ..a "real money" footing? ..would it have to go down to around 7,000 pts?
Today it is at 8,500 pts. (...and a fourth week of decline.)
Foreclosed-upon families are still waiting for that whispered, "Help is on the way", ..while the "Investment Banks" which managed all that 14,000 pt. summiting are receiving billions in "consolations for their loss".

CalCarp:

Hah!!! .."Vanderbilt, Edison, Westinghouse, Carnegie, Ford, etc." ..would never have sold a "partnership in their business" to someone who could not afford the ticket!!
And the "leverage" used to build railroads was the hunger of displaced cowboys and immigrants.
"hunger" is now illegal.

CalCarp:

..and yes, Virginia, ..George Washington, and Abraham Lincoln DID build this country.
Although I can see why no one remembers that today.

Ginger:

I suspect that you are not too familiar with the margin buying process. As you stock proceeds downward, you must put up more money -- a margin call. As it drops, your leverage decreases and the losses are yours. It was not margin buying that caused the current economic crisis.

The previously mentioned people all sold shares in their business. They were sold through the market. They did not question if or not the buyers could afford them. They did not question if the were bought on margin. The leverage was between they buyer and his broker. It was leverage that brought us out of the covered wagon and pony express era.

And what, exactly, dig George Washington and Abraham lincoln build, or cause to be built? They ran the federal government; not the economy.

CalCarp:

Why do you assume all "margin calls" are answered?
Has no one ever failed to come up with their due remainder?
Has no broker ever lost out when that "investing" gambler couldn't pay up?
Have any brokerage houses gone bankrupt lately?
Did the "investors" they shepherded failed to come through when called upon?
Credit may be tighter at 90% margin requirement, ..but failures would be fewer!

Ginger:

No, not all margin calls are answered, but brokerage house losses are at a minimum. In addition to the money you put up for the stock, you must also maintain a margin account. The more you have on margin, the more that is required in your account. Margin calls are withdrawn from your account. The money you put toward the stock may be only 50%, but when you add the money on deposit with the broker it brings it higher than 50%.


I have not bought any stocks on margins, but I have entered bull call option spreads that did require a margin deposit. Believe me, the brokerages do very well at protecting themselves.


Several small brokerages have gone out of business this year, but not due to margins. They have gone under because so money of their customers have taken their money and cancelled their accounts.

Ginger:

As a stock price drops, the margin rapidly approaches 90%. Back in the 20's you could buy with as little as 10% margin with little or no margin account. You can bet that made mincemeat out of several brokers.

CalCarp:

Hello, Ginger, ..it's Gilligan again, ..
I notice you've said "call option" a little above, ..please note that I am NOT here questioning the ongoing obligations associated with calls, puts, futures, or any other assets of fluctuating value.
I am presuming this Reg T "stock margin requirement" (..50% cash down)applies to the initial purchase of standard corporate bonds and stocks.
To me that means a broker is able to buy me $1,000 dollars of a stock, even if I only have $500 dollars in my pocket. To me, that's gambling!
If the stock drops (..can't now sell for the $1,000 dollars) ..and I still don't have that other $500 in my pocket, ..who get's stuck with the loss?
You might say the broker, ..but what if that broker can't cover it either?
Especially: Where did the money come from to purchase that $1,000 of stock or bond? ..Did the company issuing the bond get $1,000 somehow?
I shudder to think the broker added $500 dollars from someone's retirement account to my $500 to make it.

Ginger:

The broker must pay the full $1000 for the stock. The other $500 is a loan from the broker to the buyer. The buyer will also have to pay interest on that loan. The seller of the stock gets full price.

The buyer's margin limit is usually less than the total assets of his account. You can not just walk in off the street, as a new customer, and buy stock for 50% down. Also, margin buying is not allowed in an IRA.

CalCarp:

Thank you, Ginger. I'm glad to know the issuing company gets it's full value, and that the broker's "loan" has an interest attached, however unwise "stock loans" may be in the long run.
I suspect, though, that what you are describing are "practices" in trade.
I am concerned with what our laws require.
What I see "required" is that a client must post a minimum of 50% of the security's value with the broker in order to make the purchase. And that if a client requests a purchase of some securities for which he or she does NOT have at least 50% of the purchase cost posted with that broker, ..then a "margin call" is made, demanding additional deposits in order to cover that deficiency.
That "margin call" would seem to need to be satisfied before the purchase, ..and therefore quite different from any subsequent (..and maybe "voluntary") margin calls made upon a drop in that stock's value, in order to cover against loss of that 50% loan amount which was extended by the broker.
(..Thnx!)

Ed:

Buying on credit is a good idea for the most part. Most people would never be able to get a house or car without credit. Many people would not be able to invest for retirement without being able to buy stock on credit.

CalCarp:

Wow! ..I just really disagree!
My retirement account is furnished by weekly deductions from my paycheck.
If I divert $4,000 dollars this year to that account, ..I will receive $4,000 dollars worth of mutual shares. There are no securities provided to me "on credit".
I get what I pay for!
Yes, houses are usually bought on credit, ..but the distance between the creditor and the borrower is much shorter, and more easily traced.
But suppose that Joe Walker goes to a broker with $4,000 dollars, ..and walks out with $8,000 dollars of common stock?
If that stock crashes, who is out the "loaned" $4,000 dollars?
What if that broker had been entrusted to "guide" the investment of $10 million dollars of Acme Company's cash?
Was the $4,000 "loan" made from Acme's cash?
Does the broker just say "I'm sorry" to Acme?
..and then look the other way?

Ed:

That's not how margin works. If a stock bought on margin declines too much, there is a margin call. Let's say he has $4000 on margin (The other 4k is covered by cash).
Let's say there was a margin call at a 10% decline and the stocks go down by 10%. Joe now has to come up with $400 to cover the margin call.
The issuing company is not out any money.....they made their money on the stock when they sold it years ago when they went public. The broker is not out any money, they just need to collect $400 from Joe.
Joe is out a little bit of money....$400....but it's not such a huge problem.

CalCarp:

Ah, ..but you haven't cited an authority for DEMANDING that $400 to be paid
Perhaps there IS such a contracted agreement between buyer and seller,
..but the CFR 220.3 (c) (1) includes the following:
"Any credit initially extended may be maintained regardless of: reductions in the customer's equity resulting from changes in market prices;"
So, if a broker has purchased a unit of stock for a client who only posted 50% of the cost of that stock, ..and that stock starts to drop, ..where does the broker find the right to insist that client cover the lost value with a further deposit?
Secondly, ..can the broker force a sale of that stock (..without prior agreement) if the stock value looks like it will drop permanently?
And if such a sale is forced, ..who has priority over the money from that sale? ..Who will get repaid first? ..the client's $4,000? (..his 50% margin)
..the 50% "loan" made by the broker? ..or is the loss shared, Solomon style?

Ricke124:

Nothing new about the government.

CalCarp:

"No!, .."No! .."It's Patpaten-STEEN!"
(Sorry, ..old joke! ..Thank you, Marty Feldman/Gene Wilder!)
"Nothing new about the government" ..eh?
You know, I've heard it said that our government never plans more than four years ahead (..why is that?)
Sort of a "Marked-to-Market" approach to the (actually?) long-term future!
I've always liked the barter economy myself, ..as much as possible.
Money is not the "root of all evil", ..credit is! (see: Upton Sinclair. The Jungle, John Sayles. Matewan, ..where workers are paid in "credit" at the company store.)
The demise of cash payment, is a demise of Liberty!
(.."Give me Cash, or Give me Death!!" LOL)

CalCarp:

oh, heck, ..see also:
Goethe. Faust:
"Mephistopheles agrees to provide Faust those things which Faust can not afford, until the moment Faust attains the zenith of human happiness, at which point Mephistopheles has contract to his soul." (Wikipedia)
..or better yet:
The Bible
And the (creditor) said unto him, "All this power will I give thee, If thou therefore wilt worship me, all shall be thine." (Luke 4:6-7)
(..my apologies to anyone who thinks I am using God's words too loosely.)
A truth is marked by the fact that it keeps appearing.

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