How to Get Out of Debt in Stocks
If you trade stocks from a margin account, a significant loss places you in debt to the broker who lent you the money to buy the stocks. Margin accounts allow you to borrow money from your broker to purchase shares at a fraction of the cost. The broker uses the purchase securities as collateral for the loan. If the stock appreciates, the values of holdings increase, with less capital contribution from you. However, if the stock depreciates, you receive a margin call from the broker asking you to replenish the funds in the account. You have a few options to remedy this situation.
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Instructions
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Log into your brokerage account to determine the net value of the portfolio. The net value is the difference between your profits and losses less any brokerage fees.
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Check the value of the stocks you purchased on margin. You should check the value each day anyway, given the fluctuations in stock prices. Some stock prices move dramatically or experience wild swings, while others move up and down in small increments. The goal is to proactively manage your portfolio -- this is especially true if you trade on margin.
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Add money to your margin account to cover your position so that you do not owe any money. You can do this in several ways. If you linked your brokerage account to a checking account when you set it up, transfer the funds from your bank into your brokerage account. You can also write a check to your broker; however, this delays the payment. In addition, the check may be misplaced or lost in the mail. You can make an in-person payment if your broker has a local office. Finally, you can sell your position in other investments to satisfy the cash deposit.
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Tips & Warnings
Being proactive in managing your margin account is the key to avoiding a margin call. A margin call is when the broker contacts you to add money into the account. The cash deposit should be enough to meet the minimum margin requirement. For example, if you buy 100 shares of a stock worth $20 per share using only $1,000, the borrowed amount is $1,000 (($20 x 100 shares) - $1,000 capital). If the minimum margin requirement is 50 percent, this means the value of the portfolio must not fall below $1,000. If the shares decline in price from $20 to $2, bringing the value of the portfolio to $200. You need to inject $800 into the account to satisfy the 50 percent margin requirement of $1,000.
If you fail to make a timely deposit, the broker has the right to sell the shares and closing out your account. The broker is not required to contact you. Trading on margin is very risky.
References
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