Buying On Margin

AAA

DEFINITION of 'Buying On Margin'

The purchase of an asset by paying the margin and borrowing the balance from a bank or broker. Buying on margin refers to the initial or down payment made to the broker for the asset being purchased. The collateral for the funds being borrowed is the marginable securities in the investor's account. Before buying on margin, an investor needs to open a margin account with the broker. In the U.S., the amount of margin that must be paid for a security is regulated by the Federal Reserve Board.

INVESTOPEDIA EXPLAINS 'Buying On Margin'

Based on creditworthiness and other factors, the broker sets the minimum or initial margin and the maintenance margin that must exist in the account before the investor can begin buying on margin. Maintenance margin refers to the minimum amount of money that must exist in the account before the broker forces the investor to deposit more money. Let's say an investor deposits $10,000 and the maintenance margin is 50% ($5,000). As soon as the investor's equity dips so much as a dollar below $5000, the broker may call the investor and demand that he/she deposit additional money to bring the balance back to maintenance margin level.


RELATED TERMS
  1. Trading Margin Excess

    The funds that remain in a margin trading account that are available ...
  2. Federal Call

    A special type of margin call requiring a trader to deposit sufficient ...
  3. Buying Forward

    An investment strategy that involves the buying of money market ...
  4. Margin Account

    A brokerage account in which the broker lends the customer cash ...
  5. Buying Power

    The money an investor has available to buy securities. In a margin ...
  6. Portfolio Margin

    The modern composite-margin requirements that must be maintained ...
Related Articles
  1. Active Trading Fundamentals

    The Short Squeeze Method

    The short squeezed strategy can be risky - but also very rewarding - for those who master it.
  2. Investing Basics

    Finding Your Margin Investment Sweet Spot

    Borrowing to increase profits isn't for the faint of heart, but margin trading can mean big returns.
  3. Options & Futures

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  4. Options & Futures

    The Advantages Of SPAN Margin

    Find out how it provides futures and commodity option strategists with more bang for their margin buck!
  5. Options & Futures

    How Does Your Margin Grow?

    Risk-management tool SPAN margin boosts profitability prospects by helping to determine when to exit a trade.
  6. Active Trading Fundamentals

    Is it possible to buy mutual funds using a margin account?

    Because of the pricing/trading mechanisms used with mutual funds, they cannot be bought and sold like stocks. When trading stocks, an investor can place limit orders, engage in short selling, ...
  7. Options & Futures

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  8. Active Trading Fundamentals

    What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity risk.
  9. Active Trading Fundamentals

    What does the gearing ratio say about risk?

    Find out why lenders and investors pay close attention to a firm's gearing ratios, and why both too much and too little borrowing can be risky.
  10. Investing on margin can be profitable but it's a risky play that needs care.
    Trading Strategies

    Margin Investing: Big Risk, Big Reward

    Investing on margin can be profitable but it's a risky play that needs care.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center