margin
Borrowed money used to purchase securities, or the difference between an investment's return and its cost.
Example
“He bought stocks on margin, amplifying his gains but also his potential losses.”
Memory Tip
Writing in the MARGIN of a page adds extra. Margin in investing means extra borrowed money added to your own.
Why It Matters
Margin allows investors to amplify their purchasing power and potential returns, but it also increases risk significantly. Understanding margin is critical because borrowed money must be repaid regardless of whether your investments gain or lose value, making it essential for anyone considering leveraged investing.
Common Misconception
Many people assume margin is free money or a gift from brokers, when in reality it is a loan that requires interest payments and comes with strict rules. If your investment drops in value, you may face a margin call requiring you to deposit more cash immediately or have positions forcibly sold.
In Practice
Suppose you have 10,000 dollars and want to buy stock but use 2 to 1 margin, meaning you borrow 10,000 dollars to buy 20,000 dollars worth of shares. If the stock rises 10 percent, your position is worth 22,000 dollars, netting you a 2,000 dollar gain on your initial 10,000 dollar investment. However, if the stock falls 10 percent to 18,000 dollars, you lose 2,000 dollars while still owing back the 10,000 dollar loan, wiping out your entire initial investment.
Etymology
From Latin 'margo' meaning 'edge, border' — operating at the edge of your capital.
Common Misspellings
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