Why Buy Stocks on Margin
Below is a MRR and PLR article in category Finance -> subcategory Stock Market.
Why Buy Stocks on Margin?
Summary:
Buying on margin involves purchasing stocks using borrowed money.What Is Buying on Margin?
Buying on margin means purchasing stocks with money you borrow. If you buy stocks outright, you pay the full amount?"say $5,000 for 100 shares at $50 each. These shares are entirely yours. However, when buying on margin, you can borrow up to 50% of the cost from a brokerage. So, with just $2,500, you could acquire those same 100 shares.
How It Works:
Typically, brokerage firms require a minimum equity of $2,000 for such purchases. In exchange for lending you money, the brokerage charges interest and holds your stock as collateral. If you default, they take your stock, minimizing their risk.
Comparing to a Mortgage:
Buying on margin is somewhat like getting a mortgage for a house. You hope the stock value rises, yielding profit beyond the interest paid to the brokerage. Essentially, you control twice the shares for half the upfront cost.
The Risks Involved:
Despite the potential for significant returns, buying on margin comes with increased risks. If stock prices fall, the value of your collateral also drops. By law, brokerages cannot allow the collateral's value to dip below a certain loan percentage. If it does, a margin call is issued, requiring you to restore the brokerage’s risk to an acceptable level by adding funds. If you can't pay, your shares are sold to cover the loan, often leaving little of your initial investment intact.
Who Should Consider Buying on Margin?
While buying on margin can yield high returns, it also heightens the risk of losing your original investment. This strategy is not typically recommended for beginners or everyday investors. Even experienced investors face challenges with margin trading. Ensure you thoroughly understand all possible outcomes?"both positive and negative?"before proceeding.
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