Meaning of Buying Stock on Margin

Buying stocks on margin is a way of leveraging a stock purchase. Before you can buy margin stocks, your broker must approve a margin account, which normally requires at least a $2,000 minimum deposit. You'll also be required to put up a specified amount called the margin requirement. Minimum standards for buying stocks on margin are set by the federal government and by stock exchanges (like the NYSE). Brokers can set more stringent standards if they choose.

Size

Federal regulations allow you to buy stocks with a margin requirement of 50 percent of the price of the stock. This percentage can change but has been stable for many years.

Significance

When you buy stocks on margin, you borrow money from the broker, who charges you interest and can use all funds in your account as collateral for the loan.

Time Frame

Margin trading is short term. There's no time limit, but because you do pay interest, keeping stocks on margin for more than a few months is rarely profitable.

Calls

If the stock falls in value beyond a certain point, the broker issues a margin call. You must either add money to your account, or the broker has to sell the stock.

Considerations

Buying stocks on margin allows you to buy more stock for your money, which increases your potential profit but also your potential loss.

Resources

• Introduction to Margin Trading