| Buying on margin means that you are buying your | | | | However, there are risks to buying stock on margin. |
| stocks with borrowed money. | | | | The price of your stock could always go down. By |
| If you are buying stocks outright, you pay $5,000 for | | | | law, the brokerage will not be allowed to let the |
| 100 shares of a stock that costs $50 a share. They | | | | value of the collateral (the price of your stock) go |
| are yours. You've paid for them free and clear. | | | | down below a certain percentage of the loan value. |
| But when you buy on margin, you are borrowing the | | | | If the stock drops below that set amount, the |
| money to purchase the stock. For example, you | | | | brokerage will issue a margin call on your stock. |
| don't have $5,000 for those 100 shares. A brokerage | | | | The margin call means that you will have to pay the |
| firm could lend you up to 50% of that in order to | | | | brokerage the amount of money necessary to bring |
| purchase the stock. All you need is $2,500 to buy the | | | | the brokerage firms risk down to the allowed level. If |
| 100 shares of stock. | | | | you don't have the money, your stock will be sold to |
| Most brokerage firms set a minimum amount of | | | | pay off the loan. If there is any money left, you will |
| equity at $2,000. This means that you have to put in | | | | be sent it. In most cases, there is little of your original |
| at least $2,000 for the purchase of stocks. | | | | investment remaining after the stock is sold. |
| In return for the loan, you pay interest. The | | | | Buying on margin could mean a huge return. But there |
| brokerage is making money on your loan. They will | | | | is the risk that you could lose your original |
| also hold your stock as the collateral against the loan. | | | | investment. As with any stock purchase there are |
| If you default, they will take the stock. They have | | | | risks, but when you are using borrowed money, the |
| very little risk in the deal. | | | | risk is increased. |
| One way to think of buying on margin is that it is | | | | Buying on margin is usually not a good idea for the |
| often comparable to buying a home with a mortgage. | | | | beginner or normal, every day investor. It is |
| You are taking out the loan in the hopes that the | | | | something that sophisticated investors even have |
| value will go up and you will make money. You are in | | | | issues with. The risk can be high. Make sure that you |
| control of twice the amount of shares. All you have | | | | understand all of the possible scenarios that could |
| to see is the additional profit exceed the interest you | | | | happen, good and bad. |
| have paid the brokerage. | | | | |