INVESTING ON THE EDGE TRADERS NEGOTIATE SLIPPERY SLOPE OF BUYING ON MARGIN.

Byline: Chris Sieroty Staff Writer

Ask Lotay Yang what has contributed to the recent volatility on Wall Street, and he's quick to point to the margins.

Yang blames investors, many of them novices, who have been purchasing securities using margin accounts _ that is, borrowing money from their brokers to buy stock and using their investment as collateral.

The use of margin debt has accelerated rapidly over the past year, reflecting the overall bullish sentiment on Wall Street and the influx of new investors into the stock market.

But now that a cloud of uncertainty has returned to the markets and brokerages are calling in their loans, many of the same investors have had to sell their securities to meet the margin calls, helping to propel prices lower across nearly all indexes and exchanges.

``I think there is a misconception that margin buying is trading,'' said Yang, vice president and branch manager at Fidelity Investments in Woodland Hills. ``It is a leveraged way investors can buy blue chip stocks.''

The attraction for investors is that buying stock on margin is like having an extra line of credit, he said.

Margin works this way: Let's say an investor buys a stock for $50 and the price rises to $75. If the investor bought the stock in a cash account and paid for it in full, she'll earn a 50 percent return on the investment.

But if an investor buys the stock on margin _ paying $25 in cash and borrowing $25 from a broker _ he'll earn a 100 percent return on the money invested.

Such speculative practices have helped to drive the Dow Jones industrial average from 2,500 to over 11,000 since 1992, and the Nasdaq composite index, home to many volatile high-tech stocks, to over 5,000 earlier this year.

The downside to using margin is that if the stock price decreases, investors can experience substantial losses.

For example, an investor buys a stock for $50 and it falls to $25. If he fully paid for the stock, he'll lose 50 percent of his money. But if that same investor bought on margin, he'll lose 100 percent _ and must still come up with the money to pay the interest on the loan.

In a volatile market, investors who put up an initial margin payment for stock may be required to provide additional cash if the price of stock falls, Yang said.

Margin rules, which are set by the Federal Reserve Board, allow investors to borrow up to 50 percent of the value of their stock portfolios to purchase additional stocks.

Firms can set higher rates on top of what the Fed has decided, Yang said. Those stricter rates are known as house maintenance requirements.

Some investors have been shocked to find that the brokerage firm has the right to sell their securities that were bought on margin _ without notifying the client and at a substantial loss to the investor.

If a broker sells the stock after the price has plummeted, then the investor has lost out on the chance to recoup his losses if the market rebounds.

With the continued volatility on Wall Street, the state Department of Corporations advises investors to treat margin like any other consumer loan and use it responsibly and prudently.

Margin loans only make economic sense if investors are convinced that their stock portfolio is likely to increase enough to cover the finance charges and commissions, said Julie Stewart, a spokeswoman with the Department of Corporations.

Investors need to read and understand their brokerage firm's margin loan policies, she said.

``We want to advise people about the risks of margin trading, and this warning is part of our ongoing effort to provide investors with education,'' Stewart said.

In response to complaints that many customers have been engaging in risky trade practices such as using borrowed money to buy shares in Internet start-ups, some online firms have restricted margin lending for some speculative stocks.

Brian Dorf, associate manager of public relations at Datek Online, said there is a list of restricted stocks posted on the company's Web site. Those stocks include initial public offerings and penny stocks, which can be extremely volatile, he said.

``We also try to make (investors) aware of the risk,'' Dorf said.

When Datek Online lends money to an investor, the decision is made on a portfolio-by-portfolio basis, he said.

Stewart urged investors to carefully read their brokerage firm's margin loan policies and to contact their stockbroker if they have any questions concerning the possible risks or rewards of margin investing.

CAPTION(S):

drawing

Drawing: no caption (man standing at edge of ledge)

Bradford Mar/Staff Artist