Why Buy Stocks On Margin

 

Buying on margin means that you are buying your shares with borrowed money.

If you are buying shares outright, you pay $ 5,000 for 100 shares of a share that costs $ 50 per share. Are yours. He paid for them free and clear.

But when you buy on margin, you are borrowing the money to buy the stocks. For example, you don't have $ 5,000 for those 100 shares.

A brokerage firm could loan you up to 50% of that to buy the stock. All you need is $ 2,500 to buy all 100 shares.

Most brokerage firms set a minimum amount of capital at $ 2,000. This means that you must put at least $ 2,000 towards the purchase of shares.

In exchange for the loan, you pay interest. The broker is making money on her loan.

They will also keep your shares as collateral against the loan. If you don't, they will take the stock. They have very little risk in the deal.

One way to think about buying on margin is that it is often comparable to buying a home with a mortgage.

You are applying for the loan in the hope that the value will go up and you will make money.

You have control of twice the amount of shares. All you have to do is that the additional profit exceeds the interest you have paid to the broker.

However, there are risks when buying stocks on margin. The price of your shares can always go down.

By law, the brokerage may not allow the value of the collateral (the price of its shares) to fall below a certain percentage of the value of the loan.

If the stock falls below that set amount, the brokerage will issue a margin call on the stock for it.

The margin call means that you will have to pay the brokerage the amount of money necessary to reduce the risk of the brokerage firms to the allowed level.

If she doesn't have the money, her shares will be sold to pay off the loan. If there is money left, she will send it to you. In most cases, little of your original investment remains after the sale of the shares.

Buying on margin could mean a great return. But there is a risk that you will lose your original investment.

As with any stock purchase, there are risks, but when you use borrowed money, the risk increases.

Buying on margin is not usually a good idea for the novice or normal investor, every day.

It's something sophisticated investors even have trouble with.

The risk can be high. Make sure you understand all the possible scenarios that could happen, good and bad.