What is meant by buying stocks on margin?

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Trading on margin can be a great way to increase the return on a portfolio of investments, but it also carries serious risks. Before deciding to trade on margin, an investor must understand both the benefits and risks involved.

What is Margin?

Margin is a loan that a brokerage firm makes to a client. The client uses the margin loan to multiply his purchasing power when buying securities. In exchange for the loan, the client must pay the brokerage interest on the borrowed money.

How to Trade on Margin

In order to trade on margin, an investor must apply for a margin account at a brokerage firm. The brokerage firm will evaluate the investor's trading experience and finances before they accept the margin application.

Benefits

Margin allows an investor to increase the total number of securities that can be purchased. This can potentially increase his profits.

Risks

Trading on margin can also compound an investor's losses because the investor's buying power is increased.

Warning

An investor will get a margin call if the value of his margin account falls and fails to meet the brokerage firm's minimum requirements for capitalization. A margin call forces an investor to either deposit more cash into the account or sell the securities in the account.

Source:

Securities and Exchange Commission: Margin: Borrowing Money To Pay for Stocks

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What is meant by buying stocks on margin?

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