Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Margin Calls Hurt

As a longtime Fool writer, I traipse down memory lane occasionally, recalling highs and lows experienced by The Motley Fool and its community members. One high point, for example, is our joke. As a sobering low point, I recall one of our discussion boards' most recommended posts ever.

Written by Globalstreamer, it detailed how he got carried away using margin and lost more than $60,000. I recently read that the Carlyle Capital fund, tied to private equity giant The Carlyle Group, has received several margin calls recently.

In a nutshell, using margin is investing with money you've borrowed, typically from your broker. If your investments go up, earning more than the interest rate you're paying, you'll make more money than you could have without margin's leverage. If they go south, you'll lose money, plus you'll still owe interest on your loan.

When margin investments lose value significantly, lenders issue margin calls, requiring infusions of more capital. This can lead to a wave of badly timed selling to raise the cash needed to repay the loan.

The Carlyle Fund had invested in, among other things, several residential mortgage-backed securities from Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) . Its counterparties, many of which have issued margin calls, have included Bear Stearns (NYSE: BSC  ) , Deutsche Bank (NYSE: DB  ) , Credit Suisse (NYSE: CS  ) , and UBS (NYSE: UBS  ) .

Lesson to learn
As painful as it was for investors, this Carlyle story is a welcome one to me. It illustrates how risky it is to invest on margin. Imagine margining your account to the max, for example, and then seeing the market take a big nosedive and stay depressed for a year or three. You'll likely receive a margin call, and have to sell some valued holdings at depressed prices to meet the call. (Otherwise, your brokerage may sell your holdings for you.)

Meanwhile, you'll be paying interest for a long time, at significant rates. At Scottrade, for example, borrowing $10,000 to $20,000 recently cost 8.75%. At Fidelity, the rate was 8.825%, and at Schwab (Nasdaq: SCHW  ) , 8.95%. On a $15,000 loan, that's more than $1,000 per year.

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 596589, ~/Articles/ArticleHandler.aspx, 10/8/2015 12:39:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

Today's Market

updated Moments ago Sponsored by:
DOW 16,947.60 35.31 0.21%
S&P 500 1,993.19 -2.64 -0.13%
NASD 4,760.37 -30.78 -0.64%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
BSC.DL $0.00 Down +0.00 +0.00%
ELEMENTS Benjamin… CAPS Rating: No stars
DB $28.22 Down -0.57 -1.98%
Deutsche Bank AG (… CAPS Rating: **
FMCC $2.46 Up +0.06 +2.50%
Freddie Mac CAPS Rating: **
FNMA $2.48 Up +0.06 +2.48%
Fannie Mae CAPS Rating: ***
SCHW $28.14 Up +0.01 +0.04%
Charles Schwab CAPS Rating: ****
UBS $19.73 Down -0.24 -1.20%
UBS AG (USA) CAPS Rating: **