Margin Trading: What Is Buying On Margin?
The Basics
Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able to normally. To trade on margin, you need a margin account. This is different from a regular cash account, in which you trade using the money in the account. By law, your broker is required to obtain your signature to open a margin account. The margin account may be part of your standard account opening agreement or may be a completely separate agreement. An initial investment of at least $2,000 is required for a margin account, though some brokerages require more. This deposit is known as the minimum margin. Once the account is opened and operational, you can borrow up to 50% of the purchase price of a stock. This portion of the purchase price that you deposit is known as the initial margin. It's essential to know that you don't have to margin all the way up to 50%. You can borrow less, say 10% or 25%. Be aware that some brokerages require you to deposit more than 50% of the purchase price.
You can keep your loan as long as you want, provided you fulfill your obligations. First, when you sell the stock in a margin account, the proceeds go to your broker against the repayment of the loan until it is fully paid. Second, there is also a restriction called the maintenance margin, which is the minimum account balance you must maintain before your broker will force you to deposit more funds or sell stock to pay down your loan. When this happens, it's known as a margin call. We'll talk about this in detail in the next section.
Borrowing money isn't without its costs. Regrettably, marginable securities in the account are collateral. You'll also have to pay the interest on your loan. The interest charges are applied to your account unless you decide to make payments. Over time, your debt level increases as interest charges accrue against you. As debt increases, the interest charges increase, and so on.
Therefore, buying on margin is mainly used for short-term investments. The longer you hold an investment, the greater the return that is needed to break even. If you hold an investment on margin for a long period of time, the odds that you will make a profit are stacked against you.
Not all stocks qualify to be bought on margin. The Federal Reserve Board regulates which stocks are marginable. As a rule of thumb, brokers will not allow customers to purchase penny stocks, over-the-counter Bulletin Board (OTCBB) securities or initial public offerings (IPOs) on margin because of the day-to-day risks involved with these types of stocks. Individual brokerages can also decide not to margin certain stocks, so check with them to see what restrictions exist on your margin account.
Title/Source: Margin
Ideas 16-19
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Analyze techniques used by the author or a text to reveal or conceal his or her point of view.
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Explain in their own words the significance of specific information in written or non-print sources.
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Why do you think that some stocks cannot be bought on margin?
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Because of the risk.
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Distinguish between what is most and least important in a text.
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What does the author say is the most important thing about buying on margin?
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That it is only good for a short term investment
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Place events from literary text in chronological order by locating substantial evidence from the text.
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Identify similarities and differences between people, objects, events or ideas drawing accurate conclusion.
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Identify interrelationships between and among people, objects, events or ideas in written or non-print source.
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Determine factors that have clearly influence the outcome of a situation.
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Identify statements in texts that clearly state the cause(s) and effect(s) of specific effects.
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Clarify the meanings of words or descriptive phrases by searching for clues in the text(e.g., sentence structure, context prefixes/suffixes, spelling patterns)
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What is meant by buying on margin?
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Taking out a loan to purchase stocks.
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Make accurate generalizations about people and events based on evidence presented in the text.
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People who buy stock on margin are likely to be?
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Short money, and hoping to make a quick dollar to get rich.
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Identify inaccurate generalizations (e.g., stereotypes) in written or nonprint sources.
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Identify details in a challenging text that confirm or disprove conclusions drawn by the author or narrator and by their students, themselves or their peers.
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Make reasoned judgments about ideas and events based on evidence from written or nonprint sources.
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What assumption does buying a stock on margin make that is a risky assumption?
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That the stock would go up in value
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Unit 12: World War ll/ Where Historians Disagree
Course: American History
Unit: 12 World War II
Title: Where Historians Disagree: The Background of Pearl Harbor
Ideas 16-19
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Question
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Response
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Analyze techniques used by the author or a text to reveal or conceal his or her point of view.
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Summarize the main topic of the article. Does the author of the article take a position? Explain
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Explain in their own words the significance of specific information in written or non-print sources.
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Distinguish between what is most and least important in a text.
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Place events from literary text in chronological order by locating substantial evidence from the text.
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Identify similarities and differences between people, objects, events or ideas drawing accurate conclusion.
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Explain the different historical interpretations of Beard, Rauch, and Current.
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Identify interrelationships between and among people, objects, events or ideas in written or non-print source.
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Determine factors that have clearly influenced the outcome of a situation.
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How did U.S. foreign policy encourage the Japanese to attack Pearl Harbor?
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Identify statements in texts that clearly state the cause(s) and effect(s) of specific effects.
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Describe the cause and effect of the U.S.’s raw materials boycott.
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Clarify the meanings of words or descriptive phrases by searching for clues in the text(e.g., sentence structure, context prefixes/suffixes, spelling patterns)
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Make accurate generalizations about people and events based on evidence presented in the text.
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Do most historians today agree or disagree with the “Beard Provocation Thesis”? Explain
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Identify inaccurate generalizations (e.g., stereotypes) in written or nonprint sources.
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Identify details in a challenging text that confirm or disprove conclusions drawn by the author or narrator and by their students, themselves or their peers.
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Make reasoned judgments about ideas and events based on evidence from written or nonprint sources.
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