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Simple English definitions for legal terms
buying on margin
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A quick definition of buying on margin:
Buying on margin is when someone borrows money from a broker to buy stocks. This means they only have to pay a small percentage of the total cost upfront, but they have to pay back the loan with interest. If the value of the stocks goes up, they can make a profit, but if the value goes down, they can lose a lot of money.
A more thorough explanation:
Definition: Buying on margin is a type of investment strategy where an investor borrows money from a broker to purchase stocks. The stocks purchased serve as collateral for the loan.
Example: Let's say an investor wants to purchase $10,000 worth of stocks but only has $5,000 in cash. They can borrow the remaining $5,000 from a broker and use it to buy the stocks. The stocks purchased will serve as collateral for the loan. If the value of the stocks goes up, the investor can sell them and pay back the loan with interest. However, if the value of the stocks goes down, the investor may have to put up additional funds to cover the loan.
This example illustrates how buying on margin can be a risky investment strategy. While it can potentially lead to higher returns, it also exposes the investor to greater losses if the value of the stocks purchased decreases.