Sure, i didn't lose the roof over my head because of it, but at the same time, i bought them cash... not on credit (i don't even think that's possible anyway)
Should the gov't bail me out because I lost 40% on [stock]gcom[/stock]?
It is possible to by stocks on credit. In the stock world its called margin. So whenever you hear analysts speaking of margin, you know they're talking about stocks that were not financed with cash. The investment banker holds the stocks as collateral until the loan is paid off.
This is what I was talking about earlier in the thread or in another thread about the Great Depression. The Fed decided that investors were too leveraged (finance through debt, not equity) and that this was one of the many factors that sent the stock market spiraling down further into the depression.
So the Fed set a limit on the percentage of securities that can be bought through debt (margin). Investment banks set their own limits on margin, so they don't wind up out of money. This is what you hear referred to as a margin call. Once the stock dips below a certain point and the investor reaches a certain percentage of equity, the investment bank gives a margin call - you either put more money into your investment account, or they take the security and sell it, to cover the loan.
Here's the important part, this is the sort of legislation that I was talking about coming down the pipe for mortgages. These are my personal beliefs, but I'm nearly positive that the Fed. Govt. is going to set a limit on the percentage an individual can be leveraged as it applies to mortgages. This will limit the risk if we have a fall in home prices. The problem now is that most people had no equity in their home and now even if the homes were sold by the individual or foreclosed and then sold, the mortgages would not be covered because the market price is below the mortgage amount. (People are upside down in their homes, just like they are in their cars.)
A few weeks ago one financial analyst speculate about these regulations being in the works, but I haven't seen any talk since.
One last point, this is a complex idea and I'm not an investment banker, but the return seen when you finance through debt and earn a positive return are much higher than those returns seen by individuals who have not financed through debt. Conversely, the losses are also increased if theres a loss and its financed through debt.
Hedge funds work off of this premise. True, they work off of the premise of "hedging" stocks that have negative correlation coefficients against one another, to diversify and offset gains and losses, but
hedge funds also leverage themselves incredibly. This is why a hedge fund can see huge returns or huge losses and this is why its so risky. (There's also talks of legislation for Hedge Funds since they aren't regulated by the SEC right now).
I forget the guys name now, but he was the hedge fund manager of LCMF - the hedge fund that blew up during the dot com boom. They were leveraged for every $1 of equity, they had $50 worth of debt. So when things were good they were great but when they were bad, the effects were amplified that many more times. This same guy just sold off the other hedge fund he started in 2002 after it just saw a 27% loss last year - that one was only leveraged $17 for every $1 in equity.
