Layla wants to increase her potential for return in connection with her purchase of shares of stock in GYZ Corporation. Layla's reason for doing so is that she believes the shares of GYZ Corporation will increase sharply in the next few years as a result of a new technology developed by the corporation.

What Does It Mean To Buy Stock On Margin?

When an investor wishes to increase his or her potential return on a stock investment, it may be possible for an investor to borrow a portion of the purchase price from his or her brokerage firm.

What Is A Margin Account?

When an investor wishes to purchase stock on margin, it is necessary for the investor to set up a margin account with his or her brokerage firm. The investor must transfer a specified amount of cash and/or securities into the account. After the investor sets up the account, the investor can borrow up to a specific amount in connection with the purchase of securities.

Are There Any Risks To Buying Stock On Margin?

Yes. An investor purchases stock on margin with the expectation that the stock will increase in value. If the stock increases, the investor can repay the amount of the funds loaned by the brokerage firm, as well as the cost of any brokerage fees and commissions. If, however, the price of the stock falls, the loan remains outstanding and the investor must find another way to repay the loan. When an investor purchases stock on margin and the price of the stock falls below a specified minimum price, the brokerage firm issues what is known as a "margin call." The investor must either meet the margin call by adding to his or her margin account or sell the stock. In the event the investor elects to sell the stock at the margin call, the investor must pay the brokerage firm in full and take the loss.

Generally speaking, buying stock on margin is not a technique used by investors new to the market. It involves careful consideration of the stock purchased on margin, as well as the timing for the sale of the stock. It is, however, one mechanism whereby an investor can increase the potential of his or her return.

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