Investing in US markets

1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  29  30   

10. Trading on margin

Most US brokers offer their clients the opportunity to operate a margin account. Margin is a loan from your broker which is secured on the stocks in your account and on those you buy with the money loaned. There is a maximum depending on the asset class against which you borrow.

Using margin may be attractive in a rising market - in effect, it allows you to invest more capital than you actually own - but it can be perilous in a falling market, especially for those who lack back-up resources. The reason for this is the 'margin call'. This is the demand which your broker is entitled to make that you post additional collateral (i.e. cash, bonds or other securities) to restore your margin account to the approved percentage value of the assets in question.

Most margin calls require you to take action within 24 hours. If you don't have any assets to post as collateral, your broker is allowed to sell stocks in your margin account to rebalance the position. As, typically, this would happen in a falling market, you may get poor prices for the stocks being sold.

So, in general, margin should be used with caution, and brokers are as keen as anyone that their clients use it sensibly. It's not in their interests for their clients to get into financial difficulties. The following rules of thumb are worth noting:

• Only use a margin account if you are an experienced investor.
• Only use margin if you believe the general trend in the market is higher.
• Borrow well below the maximum permitted amount until you get used to using it - say, to a maximum of 20%.
• Remember that you will pay a premium rate of interest on margin loans.
• Act promptly if you receive a margin call.
• Remember that not all stocks can be bought on margin.

1. Diversification 2. Opportunity 3. Special features of the US market 4. You are already investing abroad! 5. Opening an account to deal in US securities 6. Inputting orders 7. Cash management 8. Currency factors 9. Tax 10. Trading on margin 11. Short selling 12. Types of investment - introduction 13. Shares (common stocks) 14. Indices 15. Bonds 16. Offshore mutual funds 17. Exchange-traded funds 18. ADRs 19. Options 20. Researching US companies - the basics 21. National newspapers 22. Regional newspapers and specialist magazines 23. Business TV 24. Company annual reports 25. Corporate web sites 26. EDGAR 27. Financial portals 28. Broker research 29. Charts 30. Conclusion

• Investing in Latin America