Margin Call. Those are the scariest words an investor can hear from the stockbroker.
Day traders and other aggressive stock investors often buy stocks "on margin," meaning that they borrow money from a securities firm to buy stocks.
A margin call means you've lost so much money on your stocks purchased with borrowed money that you must come up with more cash to put into your account, or the brokerage house will sell off your investments to pay your debts.
Margin calls are not a concern for the vast majority of investors because they simply buy stocks with cash. But some investors try to reap higher returns by investing with borrowed money.
The math is tantalizing. If you put down $10,000 and borrow another $10,000, you can buy $20,000 of stock.
If the price of the stock goes up, great. You'll make twice as much profit as you would have if you'd used only your own cash and bought just $10,000 worth of shares.
But if the stock drops, you lose twice as fast. Suppose the value of the $20,000 worth of stock you bought on margin falls to $15,000. That loss wipes out $5,000 of your down payment, leaving you with a $10,000 loan on $15,000 worth of stock.
If you get a margin call, requiring you to restore the equity in your account, you must come up with the money quickly, often in just a couple of days.
The Federal Reserve Board regulates how much investors can borrow to buy stock. For a couple of decades, the Fed has required a down payment worth 50 percent of the stock purchase.
Most major securities firms impose their own margin limits that are even tougher than the Fed's 50 percent rule. Many brokers demand a 70 percent down payment on volatile Internet stocks, and some refuse to make any margin loans on risky stocks.