Why use margins

Cost basis and return based on previous market day close. Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Buying on margin can increase profit potential, but it also brings greater risk. Leverage exemplifies gains and losses.

One of the major risks to buying on margin is that a broker may issue a margin call. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts.

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If an account loses too much money due to underperforming investments, the broker will issue a margin call , demanding that you deposit more funds or sell off some or all of the holdings in your account to pay down the margin loan.

Even those who advocate buying on margin in some situations despite the risk warn that it can amplify losses and requires earning a return that exceeds the margin loan rate. Besides using a margin loan to buy more stock than investors have cash for in a brokerage account, there are other advantages. For instance, margin accounts offer faster and easier liquidity. For example, investors can usually only withdraw cash from a stock sale three days after selling the securities, but a margin account allows investors to borrow funds for three days while they wait for their trades to clear.

Watts says his more active clients use a margin account to borrow money to invest with, but he warns that such an investment strategy is best left for a full-time trader. The problem is not knowing when the market might suddenly reverse course, he adds. Anyone who invests on margin needs to keep a close eye on their portfolio, every day.

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Edited By Brian Beers. Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Please try again later.

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