There is nothing inherently wrong about a margin operation. It is a, question of one's resources and ability to meet inevitable debts. It is no More wrong in itself to contract a margin operation in stocks than. to purchase real estate on a mortgage or to contract any other debt. It is solely a personal question, to be decided on its individual merits. But unfortunately thousands of persons do operate on margins who have not sufficient resources, and consequently much loss and suffering results.
2. Why margins are used.—Most speculators nat urally, even tho in countless cases unwisely, desire to operate with as little money of their own as possible. They realize that their profits, in proportion to the capital invested, would be greater were a smaller amount invested than if they bought their stocks out right. A man, for instance, who would buy 100 shares of some stock at 150 would have $15,000 invested. If the stock rose to 160 he would make $1,000, or a profit of about one-fifteenth of his capital. If, however, he bought stock on a margin he could probably be able to buy 100 shares with an advance on his part of $1,500, the balance being furnished thru the agency of the broker. The profit upon the transaction would re main approximately the same, but instead of making one-fifteenth of his capital his profits would now equal two-thirds of the amount of his original investment. Speculators usually prefer, even when they have large financial resources, to buy stock on margin.
It is also true that by trading on a margin a specu lator can naturally diversify his purchases much more widely. He can operate not only on a wider scale, but also with a larger reserve. He can equalize or mitigate his losses by operating in other directions.
3. Danger of unfortunate side of margin, or as it is sometimes called "account" dealing, is that if the stock declines the loss is proportionately large, just as the profit is proportionately large if the stock goes up. There is danger that if margined stock falls far enough the speculator will lose every thing he has invested unless he puts up more margin, for unless he does so the broker sells the stock for what it will bring and retains the proceeds, thus "wiping out" the speculator. The broker is obliged. to do this in order to protect himself with the bank from which he has borrowed.
Just how much additional margin a speculator is obliged to put up ; how big a decline is necessary be fore he should be asked to put up "additional" ; how long a period of time the broker should give the cus tomer to comply with the call for more margin; how much notice the broker should give before selling the customer out—all these are questions the answers to which in thouiands upon thousands of cases vary with circumstances. The courts have been called upon re
peatedly to decide them. These points will be treated in greater detail in following paragraphs.
In general brokers do not call for "additional" un less a stock has declined a full point or more. The broker must always give "reasonable" notice. In giv ing notice everything depends upon the credit and re sources of the speculator. Unless the speculator is convinced that he has bought a worthless stock or one which will never again rise in price, he shows only the most rudimentary common sense in keeping his margin ample at all times to protect himself against any de cline that may take place.
4. Amount of margin.—The most usual margin on the Stock Exchange, averaged over a period of years, is ten points, or $10 a share. In abnormal times much larger margins are required. Some brokers require more margin than others. Well known, wealthy and highly responsible persons will be allowed smaller margins than others. Highly speculative stocks are not bought on margin at all by responsible brokers. Very high-priced stocks are not safe to buy on mar gins. Low priced, but steady stocks, do not require large margins. In buying on margin, therefore, everything depends not only on the quality of the stock and its marketability, but also on the extent of its fluctuations.
5. Interest rates.—The rate which a broker charges for carrying stocks for a customer, that is, for the money which he supplies him, also varies. If a cus tomer has a big and active account the rate may be reduced, just as a large railroad is able to buy lubricat ing oil at a lower price than a small mechanic. Brok ers try to make a profit on their "interest account"• which is the technical expression for the money they loan customers. They usually charge a trifle more interest for money loaned than they themselves pay to the bank for it, and they are not permitted by the Stock Exchange to charge less. Customers are often charged six per cent. As an offset the customer is in variably credited with all dividends and interest on the stock, no matter how small his margin.