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  • So You Got A Margin Account ? 0 comments
    Jun 30, 2013 5:03 PM | about stocks: SCTY, ISIS, GTAT

    Let me get it straight with you about your margin account as well as everybody's. There is one very important thing you have to understand when you buy a stock on margin . First, you don't own that stock yet because it is still on loan by your broker until you pay in full . Often, you plan to sell it hopefully with a nice capital gain with a multiplier effect without having to pay for it in full at all. For example, you might want to buy 100 shares and you are allowed to borrow up to 50% for that stock. Sometimes , you cannot borrow up to 50% , maybe only 30% depending on your broker. This is not what I am trying to discuss, so I just want to put every one of you on notice that your broker is free to lend your margin stock to short sellers for quick sales which often depress stock prices almost irreversibly for a long time. It happens if the stock is overbought with too much margin cash by investors . This is how some stocks shoot up so fast . It is not really from investors buying with full cash all along, it is often with margin buying. This is what thrills short sellers. It is more difficult for short sellers to put downward effect on big capitalization stocks with billions of shares floating than on small growth stocks with mere millions of shares floating.

    I would suggest that if you agree with my assessment above, that you file complaint with the SEC in adequate numbers to force the SEC to prohibit margin buying on small stocks despite their torrid growth paces. If that fast growth stock is for real, then why buy on margin? After all, you are easy prey to short sellers who simply call your broker for how many shares are on margin that can be borrowed for quick pump and dump sales .

    Short sellers can stalk big capitalization stocks if they want because they will have much smaller effects on the downward direction of the stock prices than smaller and faster growing stocks that tend to go up and down every 5 seconds..

    I feel that the SEC is not doing its job protecting investors with smaller and faster growing stocks. If you think that such stock deserve 100 plus PE ratio , fine, pay for it in full . You will be glad because no short sellers can touch that stock . It will be entirely up to the long side to decide when to sell themselves not the short sellers. It is true that not every rapid growing stock survives for long, but at least you are protected from short sellers with your full paid for shares like the rest of the investors in the same stock.

    If you want to buy IBM or GE or Pfizer on margin, be my guest.. They are whales and very few short sellers has the moxie to take them down. They can try and it will be quite a speculation!

    Disclosure: I am long SCTY.

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