What does buying on margin mean?


Quick Answer

When investors buy on margin, it means they're borrowing from their broker to partly finance the stock purchase. It's a risky proposition because their investment is used as collateral, but there's a potential for higher gains than if they didn't borrow the money.

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Full Answer

The United States Securities and Exchange Commission gives an example of this: if an investor spends $50 on a stock, then if that stock jumped to $75, that's a 50 percent return. However, if the investor spent $25 but borrowed $25 from a broker, then the return would be 100 percent. Commissions and interest would still apply.

The bad news if the stock goes down. In the example, if the stock fell to $25, that's a 100 percent loss to the investor.

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