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