According to Investopedia , leverage is defined as:. It can be created through options, futures, margin and other financial instruments. You would then control shares instead of just Leverage helps both the investor and the firm to invest or operate, but people should proceed with caution, as it comes with greater risk. But what if you lose?

Buying On Margin

Borrowing money at the casino is like gambling on steroids: Conversely, your risk is also increased. Margin is a high-risk strategy that can yield a huge profit if executed correctly.

What is buying on margin? definition and meaning - icoqerum.web.fc2.com

So I am not recommending to do this, especially if you do not understand it. In the most basic form, buying on margin is borrowing money from a broker to purchase stock.

This also means you must have been approved for a margin account. By law, your broker is required to obtain your signature to open a margin account. This is known as the initial margin. You can keep this loan as long as you want, assuming you are meeting your obligations. 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.

There is also a restriction called the maintenance margin. This number is the account balance you must maintain before your broker will force you to deposit more funds or sell stock to pay down your loan. This is known as a margin call. There are costs associated with this as well, just as there would be in your average loan.

So, buying on margin is mainly used for short-term investments, because the more time that you hold an investment, the greater the return that is needed to break even to cover the costs you have accrued.

There is also another important this to note. Not all stocks can be bought on margin. The Federal Reserve Board has regulations regarding which stocks are marginable.

This is an act that forces the investor to either put more cash into his account or liquidate his position. Investopedia provided another great example for this:. As a result, the brokerage may issue you a margin call. If for any reason you do not meet a margin call, the brokerage has the right to sell your securities to increase your account equity until you are above the maintenance margin.

Even scarier is the fact that your broker may not be required to consult you before selling! Did you catch that last part? Your broker can sell before even consulting you, meaning you can easily get a horrible execution price and not even know you are no longer in the stock until minutes or hours after this happens! If you plan on using margin, I recommend you take even more time to research it.

This post is a very basic rundown, and you need to fully understand it before taking part in it. Tim cautions against using margin, and for good reason.

Using Leverage And Margin | Investopedia

What Is Stock Market Leverage. As many of you already know I grew up in a middle class family and didn't have many luxuries. But through trading I was able to change my circumstances --not just for me -- but for my parents as well.

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