Buying On Margin
What is it? When an investor borrows money from a broker to buy a security. Investors usually do this when they are confident that the price of a security will go up.For example, suppose you want to buy 200 shares of a stock that costs $20 per share. Normally, you would need $4,000 (plus commission) to purchase this security. But if you buy the security on margin, you can borrow up to $2,000 (50%) of the purchase price and pay the other $2,000 yourself. If the value of the stock goes up, you earn all the gains on the $4,000 investment, even though you borrowed half of the initial investment. At some point, of course, you need to pay back the borrowed amount to the brokerage, which charges interest for the amount you have borrowed.If the value of the stock falls, however, you will owe the brokerage for the losses. If the value of the stock falls too far, the brokerage may give you a margin call.Added By: Jayden
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