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Pexas Teat's avatar

Pedoman actually saved them though

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TundraGrifter's avatar

A margin loan is a loan secured by stock. The advantage to the borrower is that you don't have to sell your stock to raise the cash. You offer it as collateral for the debt. The lender is secured, so the interest rate should be favorable.

The downside (and there's always a downside) is that if the value of the stock declines, the lender must have more collateral. This is a "margin call." In 1929, many investors were buying more and more stock "on the margin." When prices dipped, they had to sell. All that selling at once drove prices farther down, which caused more selling, which caused further declines in the stock price.

Musk's situation is particularly interesting because Tesla is now a private company. What's the stock worth? It's a very risky loan for the lenders. We'll see how it plays out.

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