Securities: Margin Trading

Buying Stocks on Margin

What is Buying on Margin?

When you buy stocks, sometimes you can borrow money from a broker. This is called buying on margin. It means you are getting a loan to help you buy stocks.

How Does Buying on Margin Work?

When you buy stocks on margin, you need to pay some of your own money, called the margin, and then you borrow the rest from the broker. The broker gets the money from banks and charges you an extra fee for the loan.

All the stocks you buy on margin need to be kept with the broker as collateral for the loan.

Rules for Buying on Margin

The government has rules to make sure people don't borrow too much money to buy stocks. They say you need to pay at least half of the stock's price in cash, and the rest you can borrow.

What Happens if the Stock's Value Drops?

If the value of the stock you bought with a loan goes down too much, you might not have enough money to pay back the loan. The broker will then ask you to add more money or other valuable things to your account. If you don't do anything, the broker might sell some of your stocks to pay back the loan.

Why Do People Buy Stocks on Margin?

Some people buy stocks on margin because they want to invest more money than they have. This way, they can make more money if the stock goes up. But it also means they can lose more money if the stock goes down.

This article takes inspiration from a lesson found in FIN 4504 at the University of Florida.