Purchasing on margin means you're purchasing your stocks with borrowed cash.
If you are buying stocks outright, you pay $5,000 for 100 shares of a stock that costs $50 a share. They are yours. You've paid for them free and clear.
But when you buy on margin, you are borrowing the money to purchase the stock. For example, you don't have $5,000 for those 100 shares. A brokerage firm could lend you up to 50% of that in order to purchase the stock. All you need is $2,500 to buy the 100 shares of stock.
Most brokers set a minimum quantity of equity at $2,000. This implies that you must put in at least $2,000 for the purchase of stocks.
For the loan, you pay interest. The brokerage is earning profits on your loan. They will also hold your stock as the collateral against the loan. If you default, they'll take the stock. They have little risk in the deal.
One way to think of buying on margin is that it is often comparable to buying a home with a mortgage. You are taking out the loan in the hopes that the value will go up and you will make money. You are in control of twice the amount of shares. All you have to see is the additional profit exceed the interest you have paid the brokerage.
Nonetheless there are hazards to buying stock on margin. The cost of your stock could always go down. By law, the brokerage won't be permitted to let the value of the collateral ( the cost of your stock ) go down below a certain % of the loan value. If the stock drops below that fixed amount, the brokerage will issue a margin call on your stock.
The margin call implies you're going to have to pay the brokerage the sum of money critical to bring the brokers risk down to the authorized level. If you do not have the money, your stock will be sold to clear the loan. If there's any cash left, you'll be sent it. Usually, there's not much of your original investment remaining after the stock is sold.
Purchasing on margin could mean a massive return. But there's the danger that you might lose your original investment. As with any stock purchase there are risks , but when you're using borrowed money, the danger is increased.
Purchasing on margin is generally not a brilliant idea for the newbie or normal, each day financier. It is something that complex stockholders have issues with. The chance can be high. Make certain that you understand all the possible eventualities that might occur, good and bad.
If you are buying stocks outright, you pay $5,000 for 100 shares of a stock that costs $50 a share. They are yours. You've paid for them free and clear.
But when you buy on margin, you are borrowing the money to purchase the stock. For example, you don't have $5,000 for those 100 shares. A brokerage firm could lend you up to 50% of that in order to purchase the stock. All you need is $2,500 to buy the 100 shares of stock.
Most brokers set a minimum quantity of equity at $2,000. This implies that you must put in at least $2,000 for the purchase of stocks.
For the loan, you pay interest. The brokerage is earning profits on your loan. They will also hold your stock as the collateral against the loan. If you default, they'll take the stock. They have little risk in the deal.
One way to think of buying on margin is that it is often comparable to buying a home with a mortgage. You are taking out the loan in the hopes that the value will go up and you will make money. You are in control of twice the amount of shares. All you have to see is the additional profit exceed the interest you have paid the brokerage.
Nonetheless there are hazards to buying stock on margin. The cost of your stock could always go down. By law, the brokerage won't be permitted to let the value of the collateral ( the cost of your stock ) go down below a certain % of the loan value. If the stock drops below that fixed amount, the brokerage will issue a margin call on your stock.
The margin call implies you're going to have to pay the brokerage the sum of money critical to bring the brokers risk down to the authorized level. If you do not have the money, your stock will be sold to clear the loan. If there's any cash left, you'll be sent it. Usually, there's not much of your original investment remaining after the stock is sold.
Purchasing on margin could mean a massive return. But there's the danger that you might lose your original investment. As with any stock purchase there are risks , but when you're using borrowed money, the danger is increased.
Purchasing on margin is generally not a brilliant idea for the newbie or normal, each day financier. It is something that complex stockholders have issues with. The chance can be high. Make certain that you understand all the possible eventualities that might occur, good and bad.
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