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Buying Stocks on Margin - The Dumbest Man in China

Stock-Markets / Stock Markets 2015 Jun 04, 2015 - 02:15 PM GMT

By: DailyWealth

Stock-Markets

Dr. Steve Sjuggerud writes:

You can't make this stuff up...
 
"Stephen Qin, a 28-year-old office worker in northern China, traveled 1,000 miles and set up an account in Hong Kong... to trade Chinese stocks he could have bought at home," Bloomberg news reported this week.

His logic? "I can make more money if I can borrow more."
 
You see, Qin can borrow more money in Hong Kong to buy stocks than he can in China. (This is called buying on margin.) He also gets a lower interest rate in Hong Kong on that borrowed money.
 
Qin is not alone...
 
Thousands of Chinese investors are making the same "pilgrimage" to Hong Kong to open up brokerage accounts for the same reasons as Qin.
 
The Hong Kong brokerage firms are loving the influx of new business from mainland-Chinese investors. They are offering all kinds of incentives, including covering up to HK$10,000 of the travel costs from China for people opening accounts.
 
It's like a bizarre form of Las Vegas – where "the house" makes you feel good by comping your room... as long you spend money in its casino.
 
The story gets even more ridiculous...
 
Qin is excited about sitting at his computer in China and buying Chinese stocks through his Hong Kong brokerage online. For example, he recently bought Chinese shares of China Construction Bank. The thing is, the identical shares of China Construction Bank are 7% less expensive in Hong Kong than they are in China.
 
Qin drove 1,000 miles to Hong Kong... but instead of buying China Construction Bank shares that trade in Hong Kong, he bought the identical shares trading in China that were 7% more expensive!
 
As Qin's story shows, individual investors in China have lost all sense of reality...
 
The boom has finally reached the crazy stage. Just like in the U.S. housing boom a few years ago (that ended so badly), investors like Qin believe "I can make more money if I can borrow more."
 
Qin – and tens of thousands of other investors – will likely face the same fate American investors did in the housing bust.
 
The craziest part is, I'm not selling Chinese stocks yet...
 
The boom can (and likely will) get crazier before it's all over.
 
It will end – badly – at some point. A 50% fall would be nothing.
 
I just don't think we've hit the peak yet.
 
The difference between us and Mr. Qin is, we know that we are playing a game of chicken. We know that it will end and that Qin, with his borrowed money, will be wiped out.
 
Qin's story shows that Chinese stocks are reaching mania stage... but there could be much more fun ahead.
 
So we're not selling yet.
 
Good investing,
 
Steve

P.S. China will be an incredible story of boom... and eventual bust. But before the crash happens, you could make a lot of money.
 
If you're not yet a True Wealth subscriber, I urge you to come on board to get the full story of what's happening in Chinese stocks right now, and how to safely profit from it. To learn more, click here.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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