Page 139

marginable. Don’t worry about making a mistake here. Your broker will not execute a margin order for non-marginable stocks. You can only buy them with cash.

At this point you should have a pretty good idea of the risks and rewards of margin as a leverage tool. The stock market scene is rife with stories of investors who went from riches to rags playing the margin game, essentially buying stocks on credit. At one moment you are on top of the world and the next you are heavy in debt. If you decide to use margin, take heavy precautions. You are playing with someone else’s money and when all is said and done, you will have to return it. For that reason many investors decide to forgo the potential gains and only invest with their own cash. It’s up to you to decide whether buying on margin is right for you. And remember that in our examples I purposely omitted transaction fees and interest for simplicity. Proceed with caution.

Trading (Buying And Selling) Stocks (Part III) — Orders

Buying and selling stocks is a simple matter of placing an order with your broker. Regardless of the type of broker you may have (full service, discount, deep discount) no orders can be placed for your account without your explicit permission. Before explaining the types of orders, let’s review two types of basic positions with regards to stocks. We have seen these before in the futures chapter earlier, and they also apply to stocks. They are long and short positions. A long position is achieved by buying stocks. Conversely a short position is achieved by selling stocks. These are lingoes used in the trading world to describe your account positions with respect to stocks. For example, if you buy 20 shares of Ford stock, you would be long 20 shares of Ford. In order to settle your positions you must take an opposite action. In our example, to settle your 20 longs, you must short 20 shares of Ford, in other words sell 20 …