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Lesson 9. Opening a Brokerage Account > Margin Account - Pg. 48

Opening a Brokerage Account 48 In the worst-case scenario, the brokerage would simply either freeze your account until such time as you coughed up the $7, cancel the purchase, or otherwise deal with the situation. Many broker- ages will still allow you to make trades, as long as you put up the cash, and will freeze only the amount in question. In any event, you would definitely be aware of what was going on or what had already happened, and nothing would have happened that could get you into financial trouble. Safeguarding Your Trades Another way in which the cash account covers you from debt trouble in the market (never a good thing) is by prohibiting you from purchasing stock from the subsequent proceeds of a sale. That means you can't buy stock now with money you think you're going to make later. For example, say you invest $100 in XYZ Company stock today, and tomorrow that stock is worth $200, so you sell it. You can't get the $200 you would have made unless you initially had $100 in your account to have made the first trade. "Wait a second," you say. "If you were to have given me the $200 first, and then I were to pay back that initial $100 as if you had loaned it to me, we would all still have come out happy, right?" Let's say for a moment that you bought the $100 worth of XYZ Company stock with borrowed money or a credit line, thinking the value was going to go up, and tomorrow the market tanks and your stock is worth $10. But you've already made a second purchase for ABC Company stock with borrowed money or a credit line, thinking you'll pay it back with the money you're bound to get from the XYZ purchase. Since the original investment never paid off, you're in way over your head. Tip Beginning investors should seriously consider opening a cash account that limits any type of financial damage from a bad investment to nothing more than the initial amount invested. While it's not a great idea to purchase stock on credit at any time, it's especially bad for new