The word Margin is a term you may likely come across as a stock trader. Your stockbroker may use it at some point, so it is better you know the meaning of buying stock on margin as you progress as a trader.
Buying stock on margin is when an investor borrows money from his or her broker to buy more shares. Simply put, it is a loan request from an investor to his broker. The idea is to enable the investor to buy more shares even when his money isn’t enough. Also, a margin account is required before an investor can trade on margin. The investor or trader must open one even though he has the regular cash account.
This simple illustration below will help you understand the process better.
Let’s assume you discovered that the stock for Bluemeldows Inc. is $30 per share and strongly believe the value will increase. Because of this, your interest was to buy 150 shares but has just $2,500. In this case, you can borrow the remaining $2,000 from your broker to buy the 150 shares you have interest in.
Buying stock on margin is seen as a great way to make more money. If you have some funds in your brokerage account, you can borrow extra money to fund your interest to buy more shares. But ensure you do your homework well before taking any decision to borrow.