The double-edged sword of using margin to borrow money to buy stocks

The double-edged sword of using margin to borrow money to buy stocks /by Invest Man
in general A popular way to buy stocks the easy way.
That is, how much money you have, you can only buy stocks.

But did you know that there are still many people who choose to borrow money from brokers? to buy more shares from available money or known as “Use margin to buy stocks”

In which investors must place collateral. It could be cash or stock. according to the proportion set by the broker which must also pay interest to the broker

to visualize more Let’s take a look at this example.

We have an investment of 1,000,000 baht and want to invest in stock A for 10 baht, meaning that we can buy 100,000 shares of A.

If the price of stock A rises to 11 baht
Then we sell stock A, we will get 1,100,000 baht or 10% profit.

But in the case of using margin, assuming that the broker requires the collateral of Shares A at 50%

This means that we will be able to invest in stock A for a total of 2,000,000 baht, of which 1,000,000 baht is our money (which is collateral with the broker) and the part borrowed from the broker 1,000,000 baht.

So stock A at 10 baht we can buy 200,000 shares.

If the price of stock A rises to 11 baht or 10%
If we sell stock A, we will get 2,200,000 baht and return it to the broker for 1,000,000 baht, leaving 1,200,000 baht, equal to 20% profit.

It can be seen that in both cases, when stock A rises by 1 baht or 10%, the same, but in case 2, we will get double the profit.
but must be noted that Has not deducted the interest borrowed from the broker.

On the other hand, if the price of stock A declines,
We may come across a situation called “Margin Call” or the broker. Calling customers to bring cash or shares to be placed as additional collateral

Let’s say the broker sets a Margin Call rate of 35% for the margin loan.

If the price of share A decreases to 7 baht or decreases by 30%, it means that the total investment value will now be 1,400,000 baht.

but our collateral will be worth 400,000 baht, which is caused by

– The initial investment of 2,000,000 baht, minus the current investment value of 1,400,000 baht, will result in 600,000 baht.

– Bring 600,000 baht to deduct from the value of the collateral that we placed with the broker 1,000,000 baht.

Causing our collateral value to be 400,000 baht

If divided by the current investment value of 1,400,000 baht, there will be a proportion of 28.5%, which is lower than the margin call rate set by the broker.

When it’s like this, the broker will inform us to place an additional 90,000 baht as collateral, which can be stocks or cash. to bring the collateral value back to 490,000 baht or at the Margin Call rate of 35% as specified

You can see that if the price of share A continues to decline, then investors need to place more collateral.

which if the stock price drops to a certain point where investors do not bring additional collateral Brokers also have the right to force the sale of shares. To repay the loan debt called Force Sell or the sale of stocks at every price. which is considered a risk that causes us to lose enormously

in the present Not many investors use a margin account to invest a lot. When a force sell occurs, it may scare other investors and sell their stocks, which can cause the stock price to drop drastically as well.