Definition§
‘On Margin’ denotes a method in securities trading where an investor borrows funds from a broker to purchase securities. The investor pays a part of the purchase price and the broker lends the rest. This borrowed amount is collateralized by the purchased securities and possibly other securities in the investor’s brokerage account.
Examples§
- Stock Purchase: If an investor wants to buy $10,000 worth of stock but only has $5,000, they can purchase the stock on margin. The broker loans the remaining $5,000, using the $10,000 worth of stock as collateral.
- Intraday Trading: Suppose an active trader buys stocks on margin in the morning and sells them by the end of the trading day at a profit, repaying the borrowed funds and keeping the profit.
Frequently Asked Questions (FAQs)§
1. What are the risks of trading on margin?§
Trading on margin can amplify both gains and losses. If the value of the borrowed securities decreases, investors must cover the margin call by depositing more funds, or the broker might sell their securities to reduce the risk.
2. How much margin can I use?§
This depends on the regulations in your country and the specific broker’s policies. Typically, brokerage firms allow up to 50% margin for purchasing securities.
3. What is a margin call?§
A margin call occurs when the value of the securities in the margin account falls below a certain level, prompting the broker to demand additional funds or sell some assets to bring the account back to an acceptable level.
4. What are the interest rates for margin loans?§
Interest rates on margin loans vary among brokers and depend on the amount borrowed and market conditions. They generally range from 3% to 8%.
5. Can I use margin in other types of accounts?§
Margin is typically used in individual and joint brokerage accounts but not in retirement accounts like IRAs because of regulatory restrictions.
Related Terms§
- Margin Call: A demand by a broker that an investor deposits additional money or securities to cover potential losses.
- Leverage: The use of borrowed capital to increase the potential return of an investment.
- Collateral: An asset pledged to a lender to secure a loan.
- Initial Margin: The percentage of the purchase price of securities that an investor must pay for with their own funds.
- Maintenance Margin: The minimum account balance required to keep an open position.
Online References§
Suggested Books for Further Studies§
- “Margin Trading from A to Z” by Michael Sincere
- “The Ultra Wealthy Investor” by John-Victor Louis
- “Security Analysis” by Benjamin Graham and David L. Dodd
- “The Essays of Warren Buffett: Lessons for Corporate America” compiled by Lawrence A. Cunningham
Fundamentals of On Margin: Investment Strategies Basics Quiz§
Thank you for exploring the concept of trading ‘On Margin’ and for testing your knowledge with our fundamental investment strategies quiz. Keep leveraging your learning for better financial decisions!
