What is a margin?
In the investing world, buying on margin means borrowing from a broker to purchase stock. You pay only a certain percentage (or margin) of the cost, the remainder of the money is borrowed from the broker.
Where have you heard about margins?
Also known as margin trading, the term ‘buying on margin’ comes up in discussions about leverage.
If you can borrow money to invest (that’s called leverage) then you can potentially access returns you wouldn’t otherwise get. Of course, you could also potentially lose the lot.
What you need to know about margins...
To buy stock in this way, a trader needs to have a margin account with their broker. They also have to deposit a certain amount of money or securities, known as the minimum margin, into this account before they can start trading.
Once the account is up and running, traders deposit a percentage of the price of the stock they want to purchase into the account. This is called the initial margin. Investors can borrow up to 50% of the stock purchase price from the brokerage but they can choose to borrow less, and some brokers ask investors to deposit a much higher proportion.
Investors have to maintain a minimum percentage of at least 25% of the total market value of the securities in their account. This is known as the maintenance margin.
The securities investors have to keep in their account count as collateral for the loan. Of course, interest charges also apply to the money borrowed on margin, so the longer you hold the loan the more debt you will accrue. For this reason trading on margin is more suited to shorter term investments.