Buying stocks on margin allows you to purchase more shares then you can afford. It's like buying stocks on your credit card. As with your credit card, you will pay interest on the outstanding balance. Fortunately, margin rates are much lower than credit card rates, but they can be just as abusive.
Does buying stocks on margin make sense? Let's just say that the crash of 1929 was partially caused by margin, which triggered the Great Depression. The regulatory bodies learned their lessons, and that is why we have margin calls. Margin calls make investors come up with the cash after their positions fall by a certain amount.Buying stocks on margin is great in an ideal world. The stock market goes up and you make greater profits. It's as simple as buying low and selling high. In reality, investors are often wrong and margin investing can eat through your investment capital, forcing premature selling.Professionals frequently dismiss falling markets as brief dips. Margin investors dip into their savings and pay off their margin calls. A few more dips and their savings dry up and they are forced to sell their securities to cover the margin call. Many investors get riskier in attempt to make up their losses, and a downward spiral follows. If you're investing in equities, you're better off sticking with the slow and steady approach. Using margin follows the same discipline as using credit cards. If you don't apply for them, you can't use them!
