Why Buy Stocks on Margin?
Buying on margin means that you are buying your stocks with borrowed money. 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 brokerage firms set a minimum amount of equity at $2,000. This means that you have to put in at least $2,000 for the purchase of stocks. In return for the loan, you pay interest. The brokerage is making money on your loan. They will also hold your stock as the collateral against the loan. If you default, they will take the stock. They have very 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
