What does it mean to buy stock "on the margin?"?

Question

I am a middle schooler doing this question for Social Studies and I can't seem to find the answer anywhere! Thanks in advance.

Answer 1

You can buy stock by depositing 50% of the value of the purchase with your stock broker and the broker will lend you the rest. The 50% is known as the margin requirement. It used to be much less, 10%. But during dramatic stock market drops the margin can get wiped out rapidly so now the margin requirement is set at 50%. In the commodities and currencies markets it is still about 10%.

So for a stock you can buy $10,000 worth of stock by depositing $5000 in margin. You can buy $50,000 worth of soybean futures or Euro futures by depositing $5000. The $5000 does not have to be in cash either. It can be is other stocks or t-bills.

The main concern for margin investors is that they might get a margin call is the value of their investment falls. If they do not meet the call, the broker liquidates enough of their holdings to meet the calls. In October of 1929 there was a mass liquidation of margin accounts.

Answer 2

Buying on margin is when you are sort of taking a loan from your brokerage and putting it straight into the stock market. The advantage is that if you only have $5000, you can invest $10000, so you basically receive double the profits you would have with your $5000. Once you sell your $10000 worth of stock you have to give your brokerage their 5000 back, and you can keep the profits from the stock. The disadvantage is that even though it doubles your profits, it can also double your losses. Margin investing is the only way you stand to lose more money than you put into the stock market. If you invested your $10,000 in the market (5000 your own and 5000 borrowed on margin) and your stock goes to 0, you now not only don't have your 5000$, but you have lost the brokerage's $5000.

Investing on margin is best suited for short term trades because in addition to paying the loan back, you have to pay a small interest rate, which really adds up over time, and if you hold it long enough, you eventually lose the leverage you would have had with the borrowed margin money.

Answer 3

Buying stock on margin means that you can buy shares and the brokerage firm will "loan" or "defer" payment on the money for the shares.

Buying on margin is helpful if you want to buy alot of stock in a company and you are sure it will go up.

Example:

Williams widgets stock trades at $20.00. If you wanted to buy 1000 shares it would cost 20,000 dollars. If the shares go up one dollar, you made 1,000 dollars.

If you bought those shares in williams widgets on margin it would look like this: You would pay half the money $10,000 dollars and it would go up $1 dollar a share. You would make 10% on margin (10000 divided by 1000 dollar gain). If you paid all cash it would be a 5% gain (20,000 divided by 1000 gain).

Buying on margin is good if you know the stock will go up. If it goes down, you are in trouble.

Answer 4

Margin is buying stock and using what you have in the account as security (if you don't have the "cash" available). It's also used to increase the "leverage" of what you can purchase with cash.

Check out; http://www.sec.gov/answers/margin.htm

Answer 5

you buy the stock with only a down payment..say ten percent down..you buy on margin...but you have to pay up sooner or later...that is why people jumped out of buildings in 1929...they could not pay for their stock margins////

Answer 6

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