Buying on margin involves paying cash for a portion of an investment, with the remainder borrowed. Brokers often provide loans, and funds are held in a margin account. This strategy allows investors to maximize resources and diversify investments, while also improving creditworthiness.
Many investors choose to buy stocks and securities through a strategy called buying on margin. In essence, buying on margin only involves paying cash for a portion of your investment. The remainder of the cost associated with acquiring the title is handled by borrowing resources. The cash amount of the purchase actually forms the marginal part of the equation, while funds secured through the guarantee of an asset loan are usually referred to as borrowed money.
Margin buying is especially common when buying securities through a brokerage firm. In many cases, the broker will provide the means to secure a loan to handle a portion of the total investment cost. The brokerage firm may choose to handle the loan in-house, using reserved resources for the purpose of buying on margin. More often, however, the broker actually acts as the liaison between the investor and the source of the borrowed revenue. Funds are usually held in a margin account maintained by the broker and may include collateral which can also be used to cover the cost of the borrowed funds in the event of an investor default.
Investors may choose the margin buying strategy for several reasons. Making use of the combination of cash on hand with credit resources placed in a margin account means that the investor is able to maximize the use of available resources. Being able to use more than one type of financial asset in the investment process can often mean the ability to take part in investment schemes where there is the potential to earn a large amount of money from the venture. Secondly, buying on margin means that not all liquid assets are tied into a single investment project. If a project fails to generate revenue, then there is still some cash left to try something different. Finally, the use of margin buying and timely hedging of loans helps strengthen the investor’s creditworthiness, which can come in very handy at a later date.
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