Post by epaul on Feb 1, 2021 17:56:08 GMT -5
The dreaded margin call. I had one. Didn't like it one bit.
You buy a market security/commodity on margin (buying on margin). That is what the "borrowed bucks" part of trading/speculating is. You buy control of a stock/commodity unit but only have to pay a percentage of the price with the brokerage furnishing the balance of a payment via a loan to your account.
Say you want to buy a May wheat contract. The Chicago Board of Trade is listing the May contract for #1 hard winter wheat at $5 a bushel. The trading unit in wheat is 5,000 bushels. That contract is worth $25,000. But you get to buy it on margin, say 10%, and you send a check for $2,500 to the brokerage firm.
Time to get rich. For every ten cents wheat goes up, you make $500 (5,000 bu. X .10). And you are hoping it goes up a buck because a farmer friend told you that the winter wheat crop in Kansas looks like shit and they've turned the cows loose on it... plus there was a hard freeze reported just outside of Omaha. Wheat's going up a buck and you will pocket $5,000 and get a motorcycle.
But, the next day, wheat goes down twenty cents. And you get a margin call from your broker. The value of the wheat contract you hold has gone down a specified percentage and you have to whistle off a check to cover the difference. You mail them $500. Wheat goes down twenty cents the next day. Turns out some crop reporting outfit says that the Kansas wheat is better than they thought it was and there was just a light frost in Omaha. You get another margin call. Another check for $500 goes out the window.
Now what, do you sell out and take your $1,000 loss or do you hold on hoping for a rally? Surely wheat can't go down anymore. Don't ring phone. Don't ring. Damn, I should have just bought an option on that wheat for twenty cents a bushel. Sure it has to go up 21 cents before I make I make mly first $50, but I don't have to worry about the damn phone.
You buy a market security/commodity on margin (buying on margin). That is what the "borrowed bucks" part of trading/speculating is. You buy control of a stock/commodity unit but only have to pay a percentage of the price with the brokerage furnishing the balance of a payment via a loan to your account.
Say you want to buy a May wheat contract. The Chicago Board of Trade is listing the May contract for #1 hard winter wheat at $5 a bushel. The trading unit in wheat is 5,000 bushels. That contract is worth $25,000. But you get to buy it on margin, say 10%, and you send a check for $2,500 to the brokerage firm.
Time to get rich. For every ten cents wheat goes up, you make $500 (5,000 bu. X .10). And you are hoping it goes up a buck because a farmer friend told you that the winter wheat crop in Kansas looks like shit and they've turned the cows loose on it... plus there was a hard freeze reported just outside of Omaha. Wheat's going up a buck and you will pocket $5,000 and get a motorcycle.
But, the next day, wheat goes down twenty cents. And you get a margin call from your broker. The value of the wheat contract you hold has gone down a specified percentage and you have to whistle off a check to cover the difference. You mail them $500. Wheat goes down twenty cents the next day. Turns out some crop reporting outfit says that the Kansas wheat is better than they thought it was and there was just a light frost in Omaha. You get another margin call. Another check for $500 goes out the window.
Now what, do you sell out and take your $1,000 loss or do you hold on hoping for a rally? Surely wheat can't go down anymore. Don't ring phone. Don't ring. Damn, I should have just bought an option on that wheat for twenty cents a bushel. Sure it has to go up 21 cents before I make I make mly first $50, but I don't have to worry about the damn phone.