Margin Buying
Buying on margin is a technique used by certain investors to leverage the amount of stocks they hold and control. While not for everyone, buying on margin can be an extremely successful investment strategy, however many investors have been burned and utmost caution is advised.
Buying on margin involves borrowing money to purchase stocks and using the new stocks that you have purchased as collateral for the loan. In order to buy stocks on margin, you must first open up a margin account at a brokerage house. It is also important for you to be well aware of the SEC guidelines when beginning a margin account.
There are many SEC as well as brokerage guidelines when buying stocks on margin. Usually the highest amount of stocks that you will be able to purchase is about 50% of your investment. Many brokerage houses allow you to borrow much less.
Because buying stocks on margin is a loan, you will be charged interest. However to make margin accounts enticing to investors, the interest rates for margin accounts are lower than other types of loans.
While there are a few strategies that many investors employ when buying stocks on margin, one of them is having stricter stop- loss limits. For instance, your stop loss limit for a specific stock might be 2 points, when buying on margin it might drop to ½ a point.
Before you start a margin account and jump into margin account investing, make sure you have money put away on the side to cover your losses. Margin stock buying can be extremely volatile and is not for long term investors. However, if you are an experienced investor and looking for an interesting way to invest in stocks, buying on margin may be an exciting and profitable way to invest.
