what is buying on margin 
buying on margin occurs when an investor buys an asset by borrowing the balance from a bank or broker buying on margin refers to the initial payment made to the broker for the asset for example 10 down and 90 financed the investor uses the marginable securities in their broker account as collateral the buying power an investor has in their brokerage account reflects the total dollar amount of purchases they can make with any margin capacity short sellers of stock use margin to trade shares understanding buying on marginthe federal reserve board sets the margins securities as of 2023 under federal reserve regulation t an investor must fund at least 50 of a security s purchase price with cash or other collateral the investor may borrow the remaining 50 from a broker or a dealer 1however many brokers set higher margin requirements for their customers in addition some securities cannot be purchased on margin as with any loan when an investor buys securities on margin they must eventually pay back the money borrowed plus interest which varies by brokerage firm on a given loan amount monthly interest on the principal is charged to an investor s brokerage account essentially buying on margin implies that an individual is investing with borrowed money although there are benefits the practice is thus risky for the investor with limited funds buying on margin exampleto see how buying on margin works we are going to simplify the process by taking out the monthly interest costs although interest does impact returns and losses it is not as significant as the margin principal itself consider an investor who purchases 100 shares of company xyz stock at 100 per share the investor funds half the purchase price with their own money and buys the other half on margin bringing the initial cash outlay to 5 000 one year later the share price rises to 200 the investor sells their shares for 20 000 and pays back the broker the 5 000 borrowed for the initial purchase ultimately in this case the investor triples their money making 15 000 on a 5 000 investment if the investor had purchased the same number of shares using their own money they would only have doubled their investment from 5 000 to 10 000 now consider that instead of doubling after a year the share price falls by half to 50 the investor sells at a loss and receives 5 000 since this equals the amount owed to the broker the investor loses 100 of their investment if the investor had not used margin for their initial investment the investor would still have lost money but they would only have lost 50 of their investment 2 500 instead of 5 000 