Investors that want to buy stock but don't want to pay the full price can leverage their purchase by buying on margin. first the investor needs to set up a margin account with a broker, sign a margin agreement, and maintain a minimum balance. Once an investor dose this they can borrow up to 50% of the price of the stock and use the combined funds to make their purchase.
Investors that buy stock on a margin pay interest on the loan portion of their purchase, but they don't have to repay the loan itself until they sell the stock. Any profit that is made is all theirs. They don't have to share it. lets say for example you wanted to purchase 200 shares of a stock that is selling for $40 a share, the total cost of this purchase would come to $8,000. By buying on a margin you would only need to put up $4,000 and borrow the remaining $4,000 from your broker.
If the price of the stock rises to say $60 and you decide to sell the stock then you would make $12,000. Then you pay back the $4,000 you borrowed and you would pocket the remaining $8,000 minus the interest and commissions. That would amount to almost a 100% profit on your original $4,000 investment. Had you used all of your own money and laid out the $8,000 yourself to make this purchase, you would have only made a 50% profit: a $4,000 return on an $8,000 investment.
If an investor wants to leveraging their stock investment they do this by investing with money that is borrowed at a fixed rate of interest in hopes of earning a greater rate return. Leverage lets its users exert a lot of financial power with a small amount of their own cash. Companies use leverage or trading on equity when they issue both stocks and bonds. Their earning may increase simply because they have expanded their operations whit the money that they were able to raise by the bonds. However, they must use some of those earnings to repay the interest on the bonds.
Investors that buy stock on a margin pay interest on the loan portion of their purchase, but they don't have to repay the loan itself until they sell the stock. Any profit that is made is all theirs. They don't have to share it. lets say for example you wanted to purchase 200 shares of a stock that is selling for $40 a share, the total cost of this purchase would come to $8,000. By buying on a margin you would only need to put up $4,000 and borrow the remaining $4,000 from your broker.
If the price of the stock rises to say $60 and you decide to sell the stock then you would make $12,000. Then you pay back the $4,000 you borrowed and you would pocket the remaining $8,000 minus the interest and commissions. That would amount to almost a 100% profit on your original $4,000 investment. Had you used all of your own money and laid out the $8,000 yourself to make this purchase, you would have only made a 50% profit: a $4,000 return on an $8,000 investment.
If an investor wants to leveraging their stock investment they do this by investing with money that is borrowed at a fixed rate of interest in hopes of earning a greater rate return. Leverage lets its users exert a lot of financial power with a small amount of their own cash. Companies use leverage or trading on equity when they issue both stocks and bonds. Their earning may increase simply because they have expanded their operations whit the money that they were able to raise by the bonds. However, they must use some of those earnings to repay the interest on the bonds.
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