Lets start with the basics. What exactly does buying on margin mean? Buying on margin is in effect borrowing money from the broker you use for your stock or option trading.
Depending on your broker will effect the amount your are allowed to borrow. So for example you have 5000.00 in your account with cash and stocks. Normally its approximately 50% of that amount can be used for margin trading. (So you have an additional $2500)
Once your purchase your stock and if you decide to keep the stock. You will be charged interest every month on that amount. So just like buying stocks, what you are charged will depend on the brokerage company you use. For example fidelity currently charges 6.825%
So unless you decide to quickly sell the stock are about to deposit additional money into your account to cover the margin trade. Holding the stock can be very costly.
If you decide you would like to open a margin account with your broker. There are a few things you’ll need to do.
You’ll need a to fill out some paper work. Your broker has to have you sign an agreement before allowing margin trading .( legally your signature is needed)
You’ll need at least $2000 in your account depending on your broker. The amount could be higher. Again depending on your broker.
Another thing to keep in mind if your holding stocks the price of the stocks will effect the amount available for margin trade. So lets say your you have 5000 in stocks but the price takes a huge dip and now is only worth 4000. Your available amount for margin trading will go down to 2000 instead of 2500.
Not all trade is available for margin trade.
The Federal Reserve board regulates what types of trades can be done with your margin account. Some of the more risky trades usually aren’t allowed such as Penny stocks, OTCBB securities and IPOs.
Also another thing to mention, if for some reason there is a large drop in the value of your account and you have an outstanding margin trade, your broker will call you to advise you to either deposit more money or your stocks will be automatically sold to cover margin trades.
If used correctly your margin account can be a very powerful tool. For example if you want to purchase a stock but you don’t have enough time to deposit money into your account to cover the trade. You can use your margin account until you amount is deposited.
If you decide to open a account just make sure you have enough available cash to cover the trade. If not could be a lost of some of you valuable stock.