Beware on Margin Calls

[rrt3rookie]

A little warning on margin calls. Some of you may already be aware of this, but I was not.

In one scenario, I was desparately fighting off margin calls late in the game. At this point I had sold off all the stock in my other companies, so all I could do was to have the company buy back stock. The margin call pops up at the beginning of a month. During the month I was able to get my account back into the black. However the end of the month was the end of the quarter and expenses came out, sent the stock price down, and sent my margin account back into the red. The broker immediately sold off all my shares because once you start selling your shares, the price goes down which means you have to sell more, which sends the price down,etc.

SO even though I had gotten my margin account back into the black, it does not turn off the margin call so when it checks at the end of the month, there is still an open margin call.

[OilCan]

SO even though I had gotten my margin account back into the black, it does not turn off the margin call so when it checks at the end of the month, there is still an open margin call.

Actually, it does 'turn off' the margin call when you square your account with the broker. What often happens is that a company's share price continues to fall so that when the next month rolls around, and you think you are square with the broker, you are not - your stocks have decreased in value again with the new month. You are back into negative purchasing power and your broker sells stocks to square the account.

Stocks fall in price for two main reasons: a recession is underway or company profits are turning sour. Once a company's stocks are in decline, it takes some quick action to stop the decline - or at least hold prices stable. You can buy back company stock (short term solution), pay off some bonds (short term again), and/or check all your trains for profitability and re-route the loser trains (best solution). Don't retire any trains or sell any industry during a margin call, this will hasten your company's stock decline.

The best preventive plan is to keep your personal debt less than 1/3rd of your stock value, never more than 1/2 of your stock value or the dreaded margin call will show up.

I really don't like margin calls - they mess up your quest for wealth for many, many years.