The first article in a series that I've written

[daat99]

(11-10-2014, 09:51 PM)Joey Batz Wrote: So your broker will just loan you money to trade? I grasp the concept that for every dollar he is trading, they are lending him $19 for those trades. But what if he picks winners? If he makes a dollar, where are they getting the $19 extra to pay him.

When trading equities (stocks) the 20:1 margin is usually from a firm and not from your broker.
The brokers gives you 4:1 margin for day-trading and 2:1 margin for over-night positions (when trading equities).

This is how it works:
You have $100 and you want to buy a stock that cost $100 per share.
You use the margin of 20:1 and you buy 20 shares which costs $2000 using $100 of your money and $1900 from the broker/firm money.

If the share stock price goes up to $101 than you can sell the 20 shares you just bought for $2020 getting back your initial $100 and the $20 profit (you have to pay margin fees for your firm/broker but those are negligible and amount to a few cents at most in this example).
Essentially you made 20% on your capital when the stock you picked went up only 1%.

Now lets go the other way and assume the stock price went down to $99.
You sell the 20 shares and get $1980.
You need to give the $1900 margin back to the firm/broker and you get to keep the $80.
Essentially you lost 20% of your capital because the stock you picked went down 1%...

(11-10-2014, 09:51 PM)Joey Batz Wrote: This, again, is why I just stick to dividend growth investing. As a matter of fact, it's a point that I didn't write in my article (because I didn't know about margins then): Investing is easier, safer, and simpler when you understand what a trade actually means and how all parties involved make money. I understand what a dividend is, where a dividend comes from, and why it comes to me. These margins, well, if I were ever a stock broker then I'd better hope that all my clients are dividend investors!

I also agree that dividend investing is much safer and better long-term strategy than "margin gambling".
I do believe however that a person that invest in the stock market (dividend investor or not) should know how the stock market works and how other people are using it in order to (try to) make money.
These kind of margin trades causes price fluctuations and this in return give us the dividend investors the up/down price swings which allows us to buy awesome companies at discounts (just look at fast graphs during the recessions).

As for the firms/brokers they are perfectly happy with all their customers using 1000:1 margin.
Their customers can wipe their own accounts out when a stock goes against them 0.1% and then the firm/broker gets to keep the customer houses, cars, sofas, TVs etc...

They only give margin to customers that proved they can back it up in the first place.