Margin is the difference between what money a person has on their own and what that same person owes. Buying on margin then refers to money that has been borrowed from a broker whose intended use is to make an investment, such as the purchase of a stock. The primary benefit of buying on margin is that it allows an investor to purchase more stock than they would have been able to on their own. The primary drawback of buying on margin is that it increases the amount of risk that is already present in stock trading. With a loan, comes an interest rate and some form of collateral. In this case, that collateral is the stock purchased with the loan. As a result, the effect of both gains and losses are exaggerated when buying on margin. So even though more stock may be able to be purchased, thus yielding more possible return, if the return ever drops below the interest rate owed to the broker, then the investor will lose money. If after a period of time, the interest rate can no longer be paid, then the broker will liquidate the assets the investor put up as collateral. In order to begin buying on margin, an investor needs to set up a margin account. An ordinary brokerage account will not do, due to the fact that a portion of the money in the account does not belong to the account holder. Margin accounts are set-up through a brokerage firm and typically require that a minimum of $2,000 be placed in the account. Once a margin account has been opened, the investor may begin to purchase stock. With most margin accounts, there is an initial margin. Which sets the requirement for how much of the investor's own money needs to be put into the account before any stock can be purchased. For instance, if the initial margin is 50% and the investor wants to purchase $10,000 worth of securities then the investor needs $5,000 of their own money. If the investor were to only invest in $5,000 worth however, therefore not exceeding the amount of money personally owned, then no margin has been used to buy. As a result, no official loan has been made and therefore no interest rate is owed and nor are any assets collateralized.Buying on Margin Benefits
Buying on Margin Drawbacks
How to Start Buying on Margin
Buying on Margin Example
Margin FAQs
Margin refers to money that has been borrowed from a broker. The intended use is to make an investment, such as the purchase of a stock.
The primary benefit of buying on margin is that it allows an investor to purchase more stock than they would have been able to on their own.
The primary drawback of buying on margin is that it increases the amount of risk that is already present in stock trading.
An ordinary brokerage account will not allow margin trading, due to the fact that a portion of the money in the account does not belong to the account holder. Margin accounts are set-up through a brokerage firm and typically require that a minimum of $2,000 be placed in the account.
If the initial margin is 50% and the investor wants to purchase $10,000 worth of securities, then they need to deposit $5,000 of their own money. If the investor were to only invest in $5,000 worth however, therefore not exceeding the amount of money personally owned, then no margin has been used to buy.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.