Stocks On Margin

Written by BK Shaw
Bookmark and Share

If you imagine borrowing money from the bank and paying interest on it, you will understand buying stocks on margin. You can take advantage of brokerages offering you the ability to trade on margin. Essentially, you are borrowing money to buy additional stocks. The brokerage makes money on the interest charged. If you are paying 10 percent interest as an example, you should feel confident that your stocks will appreciate by more than that amount.

Buying stocks on margin allows you to benefit from a much larger trade if you are right on the direction of price. If you are wrong, obviously the stock value will depreciate and you may get what they call a "margin call." At this point it will be necessary for you to add additional funds to your account. If you are unable to do that, your broker may sell some of the stocks you own to pay for the margin call.

Not only may you be liable for higher capital gains taxes, you will also have to pay interest. If the value of the stocks drop substantially, and you decide to pay the margin call and hang on to the stocks, you will pay a lot in interest. This means the value of the stocks will have to increase possibly more than you thought to recoup the losses, or even to yield a profit.

Understanding Stocks on Margin

Make sure you understand the pros and cons of buying stocks on margin. It can be an incredible way to maximize your profits when you're right. It can equally well be devastating when you're wrong.

Bookmark and Share