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Margin Buying Basics | by Wall Street Survivor
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Margin Buying Basics | by Wall Street Survivor

Introduction to Buying on Margin

This section introduces the concept of buying on margin, which is when you take out a loan to buy stocks. It explains that margin refers to collateral and compares it to getting a mortgage for buying a house.

What is Buying on Margin?

  • Buying on margin is taking out a loan to purchase stocks.
  • The stocks bought serve as collateral until the loan is paid off.
  • Similar to getting a mortgage for buying a house, where the house serves as collateral.

Reasons for Buying on Margin

This section discusses why someone would choose to buy stocks on margin, either due to insufficient funds or the desire to amplify gains.

Reasons for Buying on Margin

  • Insufficient funds: When an individual doesn't have enough money for the full stock purchase.
  • Amplify gains: To magnify potential profits.

Example of Buying Google Stock on Margin

This section provides an example of buying Google stock on margin and explains how it works.

Example of Buying Google Stock on Margin

  • Frank wants to buy Google stock priced at $500.
  • His broker informs him that he needs to contribute 70% as his margin requirement.
  • Frank has to put up and maintain 70% ($350) himself, while the broker puts in the remaining 30% ($150).

Selling Stocks and Calculating Gains

This section explains what happens when selling stocks bought on margin and calculates the gains made by Frank in the example.

Selling Stocks and Calculating Gains

  • If Google's stock price rises from $500 to $600, Frank decides to sell.
  • The broker sells the stock for $600, redeems the loan of $150, and returns the remaining $450 to Frank.
  • Frank made a profit of $100, resulting in a gain of 28.5% since he only invested $350.

Comparison with Traditional Stock Purchase

This section compares buying stocks on margin with traditional stock purchases.

Comparison with Traditional Stock Purchase

  • If Frank had bought the stock without using margin, his profit would still be $100.
  • However, he would have needed to invest the full price of $500 upfront.
  • Buying on margin allowed Frank to magnify his gains by 88.5%.

Risks of Buying on Margin

This section highlights the risks associated with buying stocks on margin.

Risks of Buying on Margin

  • Buying on margin is extremely risky and should be used cautiously.
  • While gains can be magnified, losses can also be amplified.
  • If the stock price plummets significantly, an individual may end up losing more money than they initially invested, potentially leading to debt.
Video description

What is buying on margin? Learn more at: https://www.wallstreetsurvivor.com Opening a margin account allows you to trade on borrowed money. You have to open up a margin account when shorting stocks because you’re borrowing the stock rather than purchasing it. In order to maintain a margin account, you must have collateral to assure the broker that he’ll get his money back. Collateral is something (in this case money) that the borrower gives the lender as protection in case he fails to pay back what he owes. Initial margin: You must keep a minimum amount of your own money in the margin account when you sell the borrowed stock. The usual requirement is 150% of the value of the short sale. Maintenance margin: This is where the risk comes in. You must also maintain a minimum amount of money in the account depending on the current value of the stock you shorted As the price goes up, the maintenance margin requirement goes up, and you’ll need to add more and more money to your account. This is known as a margin call. Get a FREE STOCK with Robinhood: http://bit.ly/FreeStockRHWSS