Do more with less
Buying on margin isn’t exactly living on the edge. But it is riskier than paying cash — sometimes much riskier.
When you buy on margin, you borrow money from a broker to pool with your cash, buying more stock than you could by yourself. Think buying a home with a mortgage loan and down payment, but usually involving less money and a shorter time frame.
The other difference is that most people borrow to buy a home because they don’t have enough in the bank to pay cash. But one reason for investing on margin is to benefit from leverage while you keep more of your cash available for other things.
What’s leverage? It’s strategic borrowing. You take a loan, in this case from your broker, because you expect to earn more on the investment than you’ll have to pay in interest on the loan. In fact, when it works best, you score with a greater percentage profit than if you’d used only your own money.
No surprise, then, about what happens if you strike out. You can lose more, too.