Tom’s Advice on Borrowing Against Margin
Transcript:
Easan Arulanantham:
So following up on Wednesdays daily video, do you ever advise your clients to borrow on margin?
Tom Vaughan:
Now? No, I’d never do margin personally, and it’s pretty popular. You know, so the thought process, just so you understand how it works is, let’s say I want to buy, you know, $1,000 worth of stock. In today’s world, I can put up $500, and borrow the other 500 and buy $1,000 with the stock. So theoretically, if it turns into $2,000, right, I pay off the 500, I make $1,500 on my $500 investment, so it magnifies my returns, but it also magnifies your losses. And they can do is what’s called a margin call. So let’s say you have that $1,000. And it doesn’t go the way you thought and it actually goes down and all of a sudden, you have $750, they might have a margin call where you have to put more money in. And so that can be really dramatic, because it’s very quick, you have to do it right away. The brokerage firm is, you know, trying to protect themselves. And it’s really, you know, you magnify that times, millions of different investors, that’s where you that’s where the market gets in trouble.
A matter of fact, that’s why they only have 50% margin in the market right now. Whereas they allowed 90% margin back in the good right before the Great Depression. That was one of the things that they now change, they can still go to 90, but at least in my entire career, it’s been at 50% margin. But, you know, again, if you look at what happens right now with the cryptocurrencies, for example, that’s, that’s a huge issue. You can go 100 to one, it’s not regulated. So that’s a recipe for disaster for that particular investor if it goes the wrong direction. So yeah, I’d be I’d be a little bit cautious with margin we don’t use it. And we would maybe use it in some really strange scenario where somebody had something super temporary, where they needed money. But generally speaking, we don’t do it. Yeah, it’s not not part of our
doesn’t doesn’t make sense to me with these with these clients.