How to buy shares with margin? Buying shares with margin involves borrowing money from a stockbroker to acquire action. You can imagine it as a loan made by your brokerage company. Purchases with margin allow you to buy more stock titles than your budget would normally leave you.
Advantages of buying shares with a margin
It can be summarized in one word: leverage. Just as a company borrows money to invest in your projects, you as an investor can borrow money and leverage the money you invest.
To clarify the concept we will use an example of how to buy shares with margin: imagine that you make a purchase for $ 20,000,000 in securities of the Hoffman Company, where $ 10,000,000 correspond to money from your pocket and the other half comes from the margin account. Hoffman is currently trading at $ 100,000 a share, but you believe that its value will grow dramatically. Normally you could only buy 100 shares, but since you are investing with margin you can buy up to 200.
Hoffman manages to hire Mortimer as the face of the company, with which the price of his action soars 25%. Your investment is now worth $ 25,000,000, so you decide to leave. After paying back to your broker the $ 10,000,000 borrowed, you get $ 15,000,000, of which $ 5,000,000 correspond to profits. You got a return on investment of 50% even though the stock only went up 25%!
Beware, that when making this example we have not taken into account the commissions or other fees that the broker could charge you (and that would decrease your profits).
I hope that with this you have been clear about the concept of buying shares with margin, although you can always ask for more information from your broker. And if you have more questions, you can leave them in the comments and I will answer you as soon as possible.
How to buy shares with margin?
When trading with marge n you get a large exposure to the market, depositing only a percentage of the capital that you are going to use. The margin corresponds to the deposit you need to open a position, defined by the margin rate that your brokerage or broker company gives you.
To give an example, if you invested $ 1,000,000 in stocks through a traditional broker, you would need to pay the million pesos in advance (in addition to the costs associated with managing your broker).
How to buy shares with margin ?: Types of margin
There are mainly two types of margin that you must take into account: initial margin and maintenance margin.
- Initial margin: The initial margin is the minimum amount that you must deposit in order to open a position. Sometimes it is also called required margin, initial deposit or simply deposit.
- Maintenance margin: Also known as the margin of variation, it is extra money that you can go to in case your position moves against you (in the opposite direction to your bet). The purpose of this margin is to ensure that you have sufficient funds to cover the current value of the position at all times, including covering possible losses in the process.