I Lost $12,000 Trading On A Margin During A Stock Market Crash

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This is a guest post by Nirushan Sivagnanasuntharam

The stock market can be a good place to invest your money. As long as you stick to blue chip stocks and don’t take any crazy risks!

Back in 2007-08, I was saving money because I lived with my parents while working. So, I decided to open an online trading account and bought some stocks. I did exactly what an inexperienced person is supposed to do except for one thing, so when the market crashed, I lost thousands. 

A discount brokerage is a good place to start

There are several online trading brokerages, but someone inexperienced with just a few thousand dollars to play around with can safely do so with a discount brokerage. I chose Questrade which charged me a low fee to buy all the blue chip stocks that I wanted.

What are blue chip stocks?

Here are a few key characteristics of blue chip stocks:

  • Generate good cash flow
  • Show long term growth
  • Prices rise long term
  • Have a respected management team

I bought stocks largely according to the advice of my father who was a part-time day trader and self-confessed market expert. It’s possible that if my father wasn’t so knowledgeable and if there hadn’t been books about trading stocks littered about our house, I may not have not undertaken this venture.

Having him around made is easier and safer for me. Without him, I probably would have put it all into mutual funds or into a high interest savings account.

At the time I was enrolled in a finance course

I was enrolled in a night school course in Finance in which we were shown a graph of the market trending upward over time. As you can see in the Dow Jones over the past hundred years, the market dips here and there, but over time it clearly goes up:

The market hadn’t crashed since 1930 so I thought I was safe as long as I wasn’t planning to make a quick buck. I remember being so excited seeing some of my gains, which in the weeks leading up the great crash were actually quite good!

Buying on a margin is risky

Because I bought stocks with solid earning potential such as First Solar, a company specializing in solar power technology and Baidu, the Chinese Google, I should have been able to come out of the market crash much better off.

The mistake was that I bought on margin which basically means that the value of the stocks I bought were greater than the money I put in. This usually isn’t a huge problem except if the market crashes which is exactly what it did.

Every day the market sunk lower. I was given a margin call which I was able to fill for a while. Looking back, I shouldn’t have put any more money in. I only kept filling margin calls with payments of $500 because I kept hoping that if the market didn’t fall further the next day or the next week, I might be alright and come out on top. But the market just kept falling and falling.

Finally, I stopped filling the calls, but not before I’d lost almost $12,000. Sometimes when I look back, I cringe at the amount of money I lost. I sure could use that money now.

I’ve told coworkers and friends and even my parents about my losses. When I bring it up sometimes my mom tells me not to talk about it and my father seems to be genuinely uninterested. I take this to be his coping mechanism upon hearing my losses.

Since the crash he has continued to be an active investor himself, albeit one with a preference for options. Sometimes he will tell me to consider buying options because they involve a lot less money, and I just tell him that I am not interested after what happened.

Only mutual funds for me (for now)

I haven’t bought any stocks since that crash. These days I invest solely in mutual funds, although I do prefer growth funds which are riskier and much more sensitive to the market than other types.

I’m good, I think, at being patient when I see my account fall after a particularly bad day on the market. I have seen my account rebound from such falls numerous times after all. But I think it will be a while before I am comfortable buying stocks again especially in light of the latest crash.

When I hear friends or family talk about investing money in stocks, I don’t try to talk them out of it. I  still think stocks can be a good investment. I do, however, on occasion, try to remind them of my experience. In hopes that they won’t make the same mistakes.

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1 Comment. Leave new

  • The story is definitely bad and the lesson is there for the taking. However, I have heard worse stories involving shorting and margin accounts. I have heard horror stories of people losing their house and family over single irreversible decisions. The common denominator though has always been greed and the urge to make the quick money built on the hope that the market will go the way you want it to go – bearish when one is shorting or puts or bullish in the case of the author of the article. Unfortunately, markets are forward-looking and unpredictable in the short term.
    Personally I am a bullish investor who relies on keeping it simple by buying the total market with index investing. It has worked for me since 2008 but the future is yet to be written.

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