Purchasing on margin means you are purchasing your stocks with borrowed cash.
If you're purchasing stocks outright, you pay $5,000 for 100 shares of a stock that costs $50 a share. They're yours. You've paid for them free and clear.
But when you purchase on margin, you are borrowing the cash to get the stock. As an example, you do not have $5,000 for those a hundred shares. A brokerage firm could loan you up to half of that in order to get the stock. All that you need is $2,500 to buy the hundred 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.
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.
A technique to think about purchasing on margin is it is frequently analogous to purchasing a home with a mortgage. You are taking out the loan in the hopes the value will go up and you'll make money. You are in control over twice the quantity of shares. All you have got to see is the extra profit surpass the interest you've paid the brokerage.
However, there are risks to buying stock on margin. The price of your stock could always go down. By law, the brokerage will not be allowed to let the value of the collateral (the price of your stock) go down below a certain percentage of the loan value. If the stock drops below that set amount, the brokerage will issue a margin call on your stock.
The margin call means you'll need to pay the brokerage the sum of money important to bring the agents risk down to the permitted level. If you do not have the money, your stock will be sold to repay the loan. If there's any cash left, you'll be sent it. Mostly, there's little 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.
Buying on margin is usually not a good idea for the beginner or normal, every day investor. It is something that sophisticated investors even have issues with. The risk can be high. Make sure that you understand all of the possible scenarios that could happen, good and bad.
If you're purchasing stocks outright, you pay $5,000 for 100 shares of a stock that costs $50 a share. They're yours. You've paid for them free and clear.
But when you purchase on margin, you are borrowing the cash to get the stock. As an example, you do not have $5,000 for those a hundred shares. A brokerage firm could loan you up to half of that in order to get the stock. All that you need is $2,500 to buy the hundred 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.
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.
A technique to think about purchasing on margin is it is frequently analogous to purchasing a home with a mortgage. You are taking out the loan in the hopes the value will go up and you'll make money. You are in control over twice the quantity of shares. All you have got to see is the extra profit surpass the interest you've paid the brokerage.
However, there are risks to buying stock on margin. The price of your stock could always go down. By law, the brokerage will not be allowed to let the value of the collateral (the price of your stock) go down below a certain percentage of the loan value. If the stock drops below that set amount, the brokerage will issue a margin call on your stock.
The margin call means you'll need to pay the brokerage the sum of money important to bring the agents risk down to the permitted level. If you do not have the money, your stock will be sold to repay the loan. If there's any cash left, you'll be sent it. Mostly, there's little 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.
Buying on margin is usually not a good idea for the beginner or normal, every day investor. It is something that sophisticated investors even have issues with. The risk can be high. Make sure that you understand all of the possible scenarios that could happen, good and bad.
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