Monday, February 22, 2016

How can margin call be good?

I read an article or a blog. The person claims that he faced margin call recently, but because his stock had already appreciated and it was an opportune time to sell. When the margin call subsided, he will continue to buy as the stock according to him is undervalued.


Investors. THINK. How can your stocks forced sold by your lenders be good?

It does not matter if the stock is undervalued or a wake up call. An investor has much less control during margin calls and stocks can be bearish for a long long time - like many months. When that happens, your holdings can be totally wiped out. Margin call can be especially painful when the holdings is large in proportion to the free floated shares. Imagine once the lender commence a margin call, and action is not taken to remedy, it can be a continuous spiral causing the stock to be continually shorted. That's how in some cases, market crash happened.

Stocks in the short term can be really volatile especially in today's age where computer algorithm trading creates huge volatility in the market.

This is not about borrowings for trading (as I am not totally against it), but be sure you have strong enough collateral to sustain. This advice or statement so irresponsible is really bad for man on the street who is discovering investments step by step.

The only instance it is good for the investor is when you act in opposite to the force sale i.e. it is opportune time to buy. When banks force sell, opportunists buy.

1 comment:

ax said...

referring to KYY?