Margin buying means that you are buying your shares with borrowed money.
If you buy the shares outright, you pay $ 5,000 for 100 shares of a stock that costs $ 50 per share. She is yours. You paid for them free and clear.
But when you buy on margin, you are borrowing money to buy the stock. For example, you don’t have $ 5,000 for that cent stock. The brokerage firm can loan you up to 50% of that to buy the share. All you need is $ 2,500 to buy all of the cent shares.
Most brokerages set the minimum capital at $ 2,000. This means that you must put in at least $ 2000 to purchase the shares.
In exchange for the loan, you pay interest. The broker earns money from her loan. They will also keep your shares as security against the loan. If you don’t, they’ll take the shares. They have very little risk in the deal.
One way to think about buying on margin is that it can often be compared to buying a home with a mortgage. Apply for the loan in the hope that it will increase in value and you will earn money. He has control over weak stocks. All you have to do is for the additional profit to exceed the return you paid to the broker.
However, there are risks when buying shares on margin. The price of your shares can always drop. By law, a brokerage is not permitted to allow the value of the guarantee (the price of its shares) to decrease to less than a certain percentage of the loan value. If the stock falls below this specified amount, the brokerage will issue a margin call on your share.
Margin call means that you will have to pay the necessary amount of money to the brokerage to reduce the brokerage firms’ risks to the allowable level. If you don’t have the money, your shares will be sold to pay off the loan. If there is money left, he will send it to you. In most cases, little of your original investment remains after the stock is sold.
Margin buying can mean a big payoff. However, there is a risk that you will lose your original investment. As with any stock purchase, there are risks, but when you use the borrowed money, the risks increase.
Buying on margin is not a good idea for the beginner or the regular investor every day. It’s something that sophisticated investors have a problem with. The stakes can be high. Make sure you understand all possible scenarios that could happen, both good and bad.