What Is Buying on Margin?
Let me explain buying on margin directly: it's when you, as an investor, buy an asset by borrowing part of the cost from your broker. You put down an initial payment, say 10% of the asset's value, and finance the rest. Your existing securities in the brokerage account serve as collateral for this loan.
This gives you more buying power, reflecting how much you can purchase using margin. Short sellers also use this to trade shares.
Key Takeaways
You're investing with borrowed money when buying on margin. This amplifies both your gains and losses. If your account drops below the maintenance margin, your broker might sell parts of your portfolio to restore balance.
Understanding Buying on Margin
The Federal Reserve Board sets the rules for marginable securities. As of 2025, Regulation T requires you to fund at least 50% of the security's price with cash or collateral, borrowing the other 50% from your broker. Brokers might demand more, and some securities aren't eligible for margin.
Like any loan, you must repay the borrowed amount plus interest, which varies by firm and is charged monthly to your account. Essentially, you're using borrowed money to invest, which is beneficial but risky if your funds are limited.
Buying on Margin Example
To illustrate, I'll simplify by ignoring monthly interest, as the principal is more critical. Suppose you buy 100 shares of Company XYZ at $100 each. You fund $5,000 yourself and borrow $5,000 on margin.
If the price rises to $200 after a year, you sell for $20,000, repay the $5,000, and pocket $15,000—tripling your money. Without margin, you'd only double from $5,000 to $10,000.
But if the price falls to $50, you sell for $5,000, repay the broker, and lose your entire $5,000 investment. Without margin, you'd lose only $2,500, or 50%.
How to Buy on Margin
Your broker sets the initial and maintenance margins based on your credit. You need a minimum balance before starting. For example, with $15,000 deposited and 50% maintenance ($7,500), if equity falls below that, you get a margin call.
You must then add funds or sell securities. If not, the broker liquidates collateral to meet the requirement.
Who Should Buy on Margin?
Buying on margin isn't for beginners; it demands risk tolerance and constant monitoring. Market crashes make it especially dangerous, even for pros. Commodity futures often use margin, and some options can now too, with 75% margin for long-term ones.
For most stock and bond investors, the added risk is unnecessary.
Advantages and Disadvantages of Buying on Margin
On the plus side, margin lets you leverage assets for larger trades, exploiting opportunities without much capital. You avoid selling existing holdings, preventing taxable events.
However, losses can exceed your initial investment, requiring more assets to cover. Plus, you'll pay margin fees, around 10% or so, which can eat into profits over time. For instance, Fidelity charges 8.25% to 12.575% depending on loan size.
Buying on Margin Pros and Cons
- Pros: Higher returns, No need to liquidate existing assets
- Cons: Higher risks, Additional margin fees
Buying on Margin FAQs
How does buying on margin work? You deposit collateral to borrow cash, up to 50% of trade cost in stocks, then speculate. Losses can lead to liquidation.
Why was buying on margin a problem? Before 1929, it fueled speculation and bubbles; crashes left traders unable to repay.
Why is buying on margin risky? It magnifies gains but also losses, potentially leaving you owing more than invested.
The Bottom Line
Margin trading means borrowing against securities for speculative trades. In bull markets, it can boost returns beyond your assets. But remember, it can also cause losses far greater than what you started with.
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