MARGINAL - buying stock on margin - includes rankings of top-performing stock mutual funds - Statistical Data Included

Kiplinger's Personal Finance Magazine, June, 2000

Q&A | The downside of BORROWING from your broker to buy stocks.

While technology stocks were taking a beating, I heard that a lot of investors were getting margin calls. What prompts a margin call? What are the advantages and disadvantages of buying stock on margin? --DONALD WOLTER, Oshkosh, Wis.

The disadvantage of buying on margin hit home in early April when many individual investors who had borrowed to buy volatile tech stocks saw those holdings plummet. Some were forced to sell already-depressed stocks to meet or avoid margin calls.

When you buy on margin, you must deposit at least half of the purchase price of your stocks to meet Federal Reserve Board regulations. The broker lends you the rest. If prices de cline and your debt reaches 75% of the value of your account, you'll get a margin call from your broker. Some brokers make margin calls when debt reaches 65%, and limits are even stricter for certain volatile stocks. To answer a margin call, you must deposit cash or securities or sell some of your holdings to bring the debt-to-equity ratio back to an acceptable level. If you don't act quickly, your broker will sell securities without your consent.

When the market goes up, buying on margin magnifies your gains. Say you bought 150 shares of a $100 stock: You put up $10,000 and the broker lends you $5,000. If the stock doubles, you've made $15,000--for a 150% return on your $10,000 (minus interest on the loan, which today is generally in excess of 8%). In a regular account, your gain would have been only 100%. But if the stock drops to $50, your shares are worth $7,500. If you sell, you'll get $2,500 back after you repay the broker's loan. So what would have been a 50% loss in the regular account becomes a 75% loss.

RANKINGS: Top-performing stock mutual funds--one year