Significance

• Buying on margin is a popular way for investors to make more money than if they paid for the securities, in total. But if the stock that was purchased on margin goes down, your loss will be magnified because you purchased it on margin. For instance, you buy a stock. Using the same example above, instead of the stock increasing, it decreases to $15,000. Should you then sell the stock and pay off your margin loan, you will lose $5,000, or half, of your investment. What's more, you are likely to receive a call from your broker with the request for cash or additional securities to restore your balance in the account.
  
  

Time Frame

• As long as the stock that you purchased increases in value, there is nothing you need to do. And if the stock you purchased pays a dividend that matches or exceeds the interest on your margin account, you're set. However, if the stock goes down in price, you will be required to add money or securities to your account or your broker will be forced to sell that stock and repay your loan.
  
  

Considerations

• There are measures you can take to avoid the chance that you will get a "margin call" from your broker. First, make sure that you have extra securities and cash in your account, and keep your margin ratio less than 40 percent. Furthermore, if you are just starting out buying securities on margin, choose stocks of companies that are relatively stable and pay a significant dividend. If the dividend is large enough, it will cover the loan interest that you owe. Finally, have a plan to pay off your loan.
  
  

Prevention/Solution

• There is one way to be sure that securities you buy on margin do not go down in price where your investment will be wiped out. It is called a stop loss order. Essentially, you tell your broker to sell the margined securities when they trade for a certain lower price. Seasoned investors who buy securities on margin place stop loss order routinely on those securities to minimize the damage caused by a down market.
  
  

Warning

• If you are basically risk-averse, buying securities on margin is probably not for you because, while you can increase your profits substantially when a security increase in value, you will only lose more money if that stock goes down. It probably will contribute to your well-being if you buy good securities in the traditional manner.