| When we talk about buying shares on margin, it | | | | many stocks. |
| normally means that you buy them with borrowed | | | | So, you will have to pay interest for this amount that |
| amount. | | | | you get on loan. This interest amount that you pay is |
| If the shares are being purchased outright, say for | | | | the profit margin which the brokerage firm earns for |
| example you buy bhp shares, it means that you are | | | | the money lent to you. These brokerage firms also |
| paying around $5,000 for around $100 shares. Thus, | | | | hold the shares that you buy as a guarantee against |
| you own these shares and it cost you not more than | | | | the money lent to you. In case you fail to pay back |
| $50 per share. This means that you have paid for | | | | the loan they will take away the shares which you |
| these shares free and clear. | | | | bought. Thus, these brokerage firms have very little |
| But here we are talking about margin. So, when the | | | | risk factor involved in this deal. |
| shares are bought on margin, it basically means that | | | | One way to think of margin on shares is to compare |
| the stocks are being purchased by the money which | | | | it to the mortgage that you get for buying a home. |
| has been borrowed. For instance, you want to buy | | | | The loan is taken always in the hope that the value |
| 100 bhp shares but you do not have the $5,000 | | | | will go up and you will make profit from it. You thus |
| required for this purchase. So you get help from a | | | | find that you're in control of twice the amount of the |
| brokerage firm. This firm lends you up to 50% of the | | | | total shares. The only thing that you need to ensure |
| total amount required to buy these shares. So, the | | | | at your end is to see that the profit margin you earn |
| total amount that you will need to buy 100 shares is | | | | is more than the interest that you pay for the |
| $2,500. | | | | brokerage. |
| Most brokerage firms set up an equity of a minimum | | | | Buying on a margin could lead to huge returns for |
| amount of $2,000. Thus, it means that you need to | | | | you. There is also a huge risk factor involved. So, |
| invest a minimum amount of $2,000 to buy those | | | | weigh the risk factors involved before you go ahead. |