How to Buy on Margin

To buy on margin you need to open a margin account. This requires cash, securities or both for the initial requirement. The Securities Exchange Act of 1934 allows 50 percent buying power. You pay monthly interest on outstanding loans. Monitor and learn about the market and individual equities because of risks.

Instructions

1. Apply for a margin account with a securities broker. Deposit the initial amount or more into the account per your broker's instructions.

2. Trade only in stocks and exchanges that allow margin trading. Your broker maintains a list of margin securities and required collateral as this varies with some stocks. Exchanges include NYSE, NASDAQ, AMEX, approved over-the-counter stocks, most mutual funds if held over 30 days and various bonds.

3. Look at your buying power daily. As the market fluctuates, your collateral goes up and down. When your collateral goes below the minimum margin requirement, your broker issues a margin call for added collateral. Either sell securities or transfer cash into your account to meet the margin call.

4. Buy a stock within your allocated buying power. Monitor this balance, updated throughout the day, to avoid margin calls when your collateral goes lower than the minimum amount.

5. Know when to sell. If your margin equity/collateral goes under the minimum requirement, the broker has the right to sell your securities to meet any margin call.

6. Understand maintenance requirements for your portfolio. For example, maintain 30 percent collateral for stocks over $4. Some brokers don't allow buying stocks under $5, but when a stock you own goes down, so does your buying power and at a greater rate.

7. Meet any margin calls quickly by selling equities or transferring cash into the account.

Tips & Warnings

• Read your broker's margin rules and regulations to understand risks, losses, margin calls and interest rates applied to the loan. Remember, all securities bought on margin remain with your broker.

• If the stock goes up and you sell, your profit includes anything over the amount of the loan. If you sell the stock for a loss, the amount of the sale automatically deducts from the loan, but you still owe the broker money on the remaining amount.

• Margin interest usually qualifies as a tax deduction. Check with your tax advisor.

• Ineligible accounts for margin trading include IRA, uniform gift and transfer to minors.