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learn how to buy stocks on margin in 3 minutes

HI,

Professor Savings here.   We teach finance basics.   Today we are going to learn how to buy stocks on margin.

Stock is an investment. Margin is buying stocks using money from your broker.

Example.  I like Unicorn Inc. plush toys.

I am very optimistic. I look at my portfolio and I have $1000 and each share is $100. I can only buy 10 shares.

But instead I barrow an additional $1000 from bank.  I have $2000 to invest so I can buy 20 shares.

Unicorn Inc. lets say rises to $200 per share. My cost is $2000.

Proceeds is $4000

Net profit is $2000

Return on investment = 100%

Compare to if I did not buy on margin.

I had $1000 to invest and I would have bought 10 shares.

My cost is $1000

Proceeds = $2000

Net profit = $1000

Return on investment = 100%

What if Unicorn Inc. falls in price.

Let’s say that it drops from $100 per share to $80 per share.

My cost  =  $2000.

Net profit = $ – 400.00

Proceeds = $1600

Return on investment = – 20%

Don’t forget the $1000 on margin is carrying an interest. So I might have a margin call.  If my balance ratio of margin debt is at 50%

In summary, margin is high risk and more for seasoned investors.

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