Buying on Margin
When you buy securities on margin, you pay for a portion of the value of the securities purchased, and borrow the rest of the money from a registered investment dealer. Under federal securities laws, your investment dealer can only loan you a set of percentage of the value of your investment, known as the maximum loan value. The maximum loan value depends on the type of securities you are buying.
What Are the Risks of Borrowing on Margin?
If the value of your loan exceeds the allowed loan value, the dealer makes a margin call, requesting that you deposit more money into your account to protect the loan. If you cannot meet the margin call, the dealer can sell some or all of your investment, even at a loss, to make up the shortfall.
In times of market decline, margin borrowing can be a quick way to lose money. While you can buy more securities using margin than you could without a loan, you could lose more than what you paid for the investment. You should be prepared to deposit more money on short notice, in order to meet margin requirements in a fluctuating market.