how to buy on margin
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 the amount is based largely on the investor s creditworthiness a maintenance margin is required of the broker which is a minimum balance that must be retained in the investor s brokerage account suppose an investor deposits 15 000 and the maintenance margin is 50 or 7 500 if the investor s equity dips below 7 500 the investor may receive a margin call at this point the investor is required by the broker to deposit funds to bring the balance in the account to the required maintenance margin the investor can deposit cash or sell securities purchased with borrowed money if the investor does not comply the broker may liquidate the investor s collateral to restore the maintenance margin who should buy on margin generally speaking buying on margin is not for beginners it requires a certain amount of risk tolerance and any trade using margin needs to be closely monitored seeing a stock portfolio lose and gain value over time is often stressful enough for people without the added leverage furthermore the high potential for loss during a stock market crash makes buying on margin particularly risky for even the most experienced investors however some types of trading such as commodity futures trading are almost always purchased using margin while other securities such as options contracts have traditionally been purchased using all cash buyers of options can now buy equity options and equity index options on margin provided the option has more than nine months until expiration the initial maintenance margin requirement is 75 of the cost market value of a listed long term equity or equity index put or call option 2for most individual investors primarily focused on stocks and bonds buying on margin introduces an unnecessary level of risk advantages and disadvantages of buying on marginmargin trading allows investors to leverage their existing assets to make much larger trades than they could make with their own assets for skilled traders this represents an opportunity to exploit market opportunities even with relatively limited investment capital margin trading allows a trader to leverage their existing assets without having to sell them if a trader liquidates their existing stock for cash they may generate a taxable event that could offset their potential investment gains however a trader who uses their existing stock as margin collateral will be able to trade without selling their stocks while margin traders can make higher profits they can also incur larger losses it is even possible for a margin trader to lose more money than they originally had to invest meaning that they would have to make up the difference with additional assets in addition to risks traders must also pay additional fees for their margin positions typically this ranges at around 10 depending on the federal funds rate for example as of january 13 2023 fidelity investments charged between 8 25 and 12 575 for margin loans depending on the size of the trader s margin position 3 if a certain position takes a long time to generate a profit these fees may offset any expected returns higher returns