What It Means to Buy Stock "On Margin"

Buy stock "on margin" is borrowing additional funds and put them into a security. Popular types of securities include, but are not limited to, corporate stocks, mutual funds, bonds etc. When you specifically buy stocks "on margin" you are undertaking one of the riskier forms of investment, however with this risk can come great rewards.

How it Works

Say you invest in a stock on 90% margin for example. If the price of the stock goes up by only 10% you have already doubled you investment. However, the other side of the same coin dictates that if the stock were to go down by 10%, you lose 100% of your money.

Leverage

A person who buys stocks on the margins in a highly leveraged way, makes themselves highly susceptible to the whims of the market. Buying stock on 90% margin is an example of a highly leveraged investment. Recently, those who bought stocks on the margin in gold and other precious metals recently are reaping the benefits of this behavior. However, someone who invested in the housing market back in 2006 might warn against jumping on the precious metal “bandwagon.” The precious metal market could very well likely be another bubble with an inevitable burst given its rapid growth recently. Still, whether your stock is bull or a bear, you will always have to pay back interest on the loan.

Goal

The overall goal when buying stock on the margin is to attain a higher rate of return than it costs to pay back the debt. Always remember not to put all your eggs in one basket. Investing in 20 different kinds of precious metals is very risky because they are all in the same market. Instead, maintain a diversified portfolio so you can recoup losses in the event one of your risky investments fail.