what does this mean? i dont get it =/?

Question

there is a general rule in the United States that one must only borrow money based on shares up to 50 percent of the shares value, one must deposit 50 percent of the value of the shares in cash with one's brokerage firm.

Answer 1

It means that a brokerage firm may lend you funds to purchase securities, but no more than 50% of the portfolio balance. It is a law that pertains to "margin" accounts. It is meant to protect the market from speculators that borrow against the value of their portfolio to buy additional stock. If you buy a stock on margin, and the stock price drops, you will receive a "margin call" from the broker, telling you to deposit funds to bring your account up to the 50% threshhold, or the broker will liquidate your holdings to make the margin call.

Answer 2

It's called a "Margin" account. Basically, you are borrowing money from the brokerage firm to buy the stock, but you still have to have the cash to pay for 1/2 of it. That way if the stock price tumbles, the brokerage isn't left empty-handed. It also helps protect you from down-side risk, and it increases your buying power and thus potential Return on Investment.

Answer 3

"Must" is the wrong word -- you are not required to do it.

In the days before the 1929 market crash, people could borrow a lot of money on margin. So, if you put $1,000 into your brokerage account, you could borrow enough to buy $10,000 worth of stock. This is great when the market was going up. But in a market crash, people not only saw their wealth collapse, but ended up owing much more than their earning potential. Many people went bankrupt.

Consequently, laws went into place where you could only borrow enoug to double your investment. If you put $1,000 into your account now and buy securities, you can borrow another $1,000 to buy more securities. Your contribution is half your total holdings (50%) -- so we say that you are at 50% margin.