Know More About Buying Shares on Margin

When we talk about buying shares on margin, it normally means that you buy them with borrowed amount.

If the shares are being purchased outright, say for example you <a href="http://www.learnshares.com.au/index.php/More-Share-Trading-Information/Company-Stocks-ASX-100/BHP-Billiton-Limited-BHP-Buy-Hold-or-Sell-Shares.html">buy bhp shares</a>, it means that you are paying around $5,000 for around $100 shares. Thus, you own these shares and it cost you not more than $50 per share. This means that you have paid for these shares free and clear.

But here we are talking about margin. So, when the shares are bought on margin, it basically means that the stocks are being purchased by the money which has been borrowed. For instance, you want to buy 100 bhp shares but you do not have the $5,000 required for this purchase. So you get help from a brokerage firm. This firm lends you up to 50% of the total amount required to buy these shares. So, the total amount that you will need to buy 100 shares is $2,500.

Most brokerage firms set up an equity of a minimum amount of $2,000. Thus, it means that you need to invest a minimum amount of $2,000 to buy those many stocks.

So, you will have to pay interest for this amount that you get on loan. This interest amount that you pay is the profit margin which the brokerage firm earns for the money lent to you. These brokerage firms also hold the shares that you buy as a guarantee against the money lent to you. In case you fail to pay back the loan they will take away the shares which you bought. Thus, these brokerage firms have very little risk factor involved in this deal.

One way to think of margin on shares is to compare it to the mortgage that you get for buying a home. The loan is taken always in the hope that the value will go up and you will make profit from it. You thus find that you're in control of twice the amount of the total shares. The only thing that you need to ensure at your end is to see that the profit margin you earn is more than the interest that you pay for the brokerage.

Buying on a margin could lead to huge returns for you. There is also a huge risk factor involved. So, weigh the risk factors involved before you go ahead.

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