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The Pros and Cons of Buying on Margin

 

Buying on Margin

Costs of Buying Stocks on Margin

Margin Call

The Pros and Cons of Buying on Margin

Psychology of Buying on Margin: Is it worth?

 

 

The opportunity provided by buying on margin is only one: investor may increase the return on invested capital if he will succeed to guess the direction of the investment market. It is kind of way which allows to get rich faster. Using a financial leverage results may be achieved faster than regularly. So if investor is sure about some price increase of a stock he should buy it on margin and double the profit. 

 

The threat is opposite. It is hard to describe the magnitude of risk that is carried by investor who is buying on margin. Investor may lose all the investments faster than he would imagine. If stocks in the investment portfolio are risky then they can fall in value very fast. For example, an investor has stocks in the portfolio worth of $10,000 but he bought it on margin and has a debt of $5,000. And then something horrible happens in the stock market and his stocks lose 30% of value in three days (that is realistic). Until he makes some action stocks lose 10% of value more, so when he sells the stocks he will have left in his portfolio with $1,000. And it is not the worst case scenario, because investor who is buying on margin may lose all investments that he has or even more; in worst case scenario an investor may be left with a debt to buying on margin service provider. 

 

 



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