Printer Friendly


Byline: Deborah Adamson Daily News Staff Writer

Investor Marc Tucker is a betting man.

He plays the high-stakes game of trading on margin, where investors use borrowed money to buy stocks, bonds and mutual funds. With 20 years of investing experience, he figures he can shift the odds in his favor.

When he wins, the leverage magnifies his returns.

"Trading on margin enhances your return on investment," said Tucker, a principal at Financial West Group in Tarzana. "Risk is easily hedged if you know what you are doing. . . . Margin is safe if used properly."

Now listen to Stuart Goldberg, attorney for two elderly sisters who lost their $1.5 million nest egg and owe another $1.5 million because of margin.

"They didn't understand the margin account," he said. "They were so unsophisticated, they didn't know with leverage came greater risk."

Nationwide, investors are borrowing ever higher levels of money to invest.

Margin debt has reached record highs from October to December, with $76.7 billion at year end, according to the New York Stock Exchange.

That sets off warning bells for Andrew Engel, senior research analyst at the Leuthold Group in Minneapolis, an investment research firm.

"There's too much optimism in the market," he said. "It's positive for the near term, but negative on a long-term basis."

Engel sees the market going upstream for a while because there aren't too many good places to park one's investments. He said the stock market remains an attractive option. But at some point there's bound to be a correction.

Today's market is 10 percent higher in valuation levels than 1987, before the 500-point crash in October, he said.

That means stock prices are higher than what they should be given company earnings, cash flow and other factors.

"Stock prices can't keep going up faster than earnings," agreed Charles Biderman, editor of Liquidity Trim Tabs in Santa Rosa, a newsletter that follows cash flows in and out of the stock market.

Engel also points out that margin debt also was high in 1987.

To invest on margin, an investor buys securities but puts up only a portion of the money. A brokerage lends the investor the rest of the purchase price - usually from 8 to 11 percent compared with the average 17 percent charged by credit cards.

For stocks, investors have to put up at least 50 percent collateral to meet the Federal Reserve Board's "Regulation T" guidelines for initial margins. The requirement could be different for different securities. U.S. Treasury Bonds, for instance, require only a 10 percent collateral.

A minimum collateral could also be required. Clients of New York Stock Exchange members must put up at least $2,000 in cash or securities to start.

If the investor doesn't have cash, he can also put up "marginable," or acceptable, securities to the broker. Some firms only take stocks with prices $10 and up a share. At Fidelity Investments, most Nasdaq stocks are acceptable but not if they are held in an individual retirement account.

The logic with margin is that you can leverage your assets to buy additional securities and increase your profits if prices rise. But if prices decline, you stand to lose more as well.

There's another catch. If the value of your part of the investment declines to less than the maintenance requirement of the total portfolio - typically 30 percent for stocks - the broker will give you a "margin call."

That means you have to put up more cash or securities and bring the balance back up. If you can't, the broker will sell your securities to pay off your loan.

For example, you want to buy $10,000 worth of XYZ Co. stock at $100 a share. You put up $5,000 in cash, or $10,000 worth of acceptable securities with a loan value of $5,000, and your broker lends you another $5,000.

If the stock goes up 20 percent to $120 a share, all is well. You've made $2,000 on an investment of $5,000, excluding commission and interest. That's a 40 percent return.

Without a margin loan, you would only have bought $5,000 worth of XYZ stock and made only $1,000. Leveraging doubles your return.

But if the price falls to $70 a share in the margin account - $7,000 in your total portfolio - then you get a margin call.

That's because your part of the investment has fallen below the required 30 percent maintenance: $7,000 minus the $5,000 loan equals $2,000 collateral or 28.5 percent of the market value of the portfolio ($2,000 divided by $7,000.)

You need to add $150 to reach the 30 percent required minimum maintenance.

You can also pay by selling securities in the account or deposit other acceptable securities to the broker.

If you can't pay, the broker will be forced to sell all or part of your collateral securities at the current market price.

In a cash account, you'd have a paper loss of $1,500 (a $30 stock price decline multiplied by 50 shares). But you don't have the pressure from the broker to add more money and you can wait out the market dips.

Because it exposes one to potentially big losses, margin trading is recommended only for investors who are tolerant of high risks.

It's not for people like Fran and Olga Monetti in Harlem, N.Y.

The two unmarried sisters, both in their 60s, lost their whole $1.5 million nest egg in April 1994 after investing in mortgage-backed derivatives on margin as advised by their broker. They also owe $1.5 million to creditor National Financial Services in Boston.

Goldberg said the sisters thought they were investing in safe, government-guaranteed securities. They did not even know they had invested on margin, having left everything to their broker.

"We didn't know anything about it until the very end. We were assured they were safe investments," said Fran Monetti. "We feel terrible. You can't imagine the stress and anguish we're going through. We were swindled."

The brokerage, High Yield Management Securities, went out of business.

The case is in arbitration with creditor National Financial Services, who wants to get its margin loan back, Goldberg said.

Officials at National Financial Services did not return calls for comment.

While the Monettis lost heavily on margin, it doesn't have to be the case for careful investors. As a precaution, brokerages also check the creditworthiness of an investor before allowing them to trade on margin.

If you are leveraged, there are several ways to lower your exposure in a market downturn.

One is to issue a stop order, said Jerry Tankersley, director of asset management services at Prudential Securities in New York. That means your broker will sell your stock if the price reaches a bottom you have set. As a result, you may be protected against steep drops in your portfolio value.

But it's not a guarantee. It won't help if the market opens below your stop price, said John Markese, president of the American Association of Individual Investors in Chicago.

Another strategy is to diversify your holdings. Buying into mutual funds is one way to prevent wild swings in prices and minimizes risk, said spokesman Tom Taggart of Charles Schwab & Co. in San Francisco.

Also, don't borrow much more than 20 percent of available credit, said Bob Blunt, general manager of Fidelity Investments' Woodland Hills branch. That way, it would have to take a major market drop before you get a margin call.

Another way to reduce risk is to pay off all or part of the loan. It would prevent panic selling in a margin call.

Margin calls and a low initial margin worsened the stock market crash of 1929. At the time, about 75 percent of investors owned stock on margin and collateral requirements were lax. Investors needed to put up only 20 percent of the total portfolio vs. 50 percent today.

Most of all, keep a close watch on your investments.


CHART[ordinal indicator, masculine]PHOTO

Photo Marc Tucker uses his 20 years of experience to help clients boost their profit potential by trading on margin. Evan Yee/Daily News Chart BORROWED RALLY
COPYRIGHT 1996 Daily News
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Business
Publication:Daily News (Los Angeles, CA)
Article Type:Statistical Data Included
Date:Feb 18, 1996
Previous Article:SOUTHLAND SALES DEFY GRAVITY\With help of urban drivers, sport utility vehicles moved from\off-road to chic symbol.
Next Article:RISE IN CAR PRICES OUTPACES AVERAGE SALARY\Sticker shock makes Americans rethink automobile love affair.

Related Articles
Twelve questions to ask about your outcomes monitoring system - part II.
Forecasting Profits.
Monaco doubles its quarter profit.
Small companies struggling for survival.
Asset distribution.

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters