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Buying on Margin

Most people buy stocks or bonds with cash they have saved or through the sale of some other investment. Typically, to buy a stock or bond, you must have cash equal to or greater than the amount required to purchase a given investment. If you don't have the cash but you have significant other securities in your account, most broker dealers will allow you to purchase your investment by borrowing the money, also known as using margin. Margin is a loan, pure and simple. You are essentially borrowing from the broker-dealer, using your securities as collateral and paying interest on the amount you borrow.

Most people use margin to create leverage with their investments. For example, let's say Greg and Connie Glover want to buy 100 shares of Sumatra Coffee Company stock at $10 per share. The cost of the stock is $1,000. Greg and Connie have $18,000 in securities that they own already and don't want to sell those securities or move money from another account to cover the purchase. Since they have $18,000 in securities being held by their broker-dealer, they can borrow up to the limit set by their broker dealer to purchase the Sumatra stock.


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