Apple Inc. stocks are expected to increase by 65% by the end of the year and you hope to get a piece of the profit. But reality hits you and you realize that you have never babbled in investments before and then you recall that you don’t have sufficient funds to gain a hefty return. Nevertheless, you still believe that an investment in Apple Inc. would be a wonderful opportunity. Well, there are many options towards gaining that initial investment fund, for example, you may ask family members/ friends or wait until you save enough funds. Yet the truth is, unless you are willing to possibly embarrass yourself in front of those close to you or wait month’s even years to have your initial investment fund, perhaps buying stock on margin would suffice.
Buying stock on margin is refers to purchasing stock within a company by borrowing funds from a bank or broker, this is said to be using leverage to maximize your gain when values increase. For instance, if a stock costs $100, but you only have $5 in funds, in retro spec the broker will lend you the remaining balance of $95 that you require. The rate at which you may be obligated to pay (the $5) lowers as the amount borrowed increases.
Increases and Decreases in value
So you purchase 50 shares for $100, of which $95 is borrowed and $5 is interest you paid, your stock value increases by 65%, leaving you with a $65 return on each share. Your investment is now worth $3,250 (50 x $65), and your margin loan will be $5. The profits will enable you to pay back the borrowed amount of $100, leaving you with a return of $3,155 ($3,250 – $95). This would be the best possible result, just remember that you are required repay, $95 plus interest to to the firm from which you got the loan.
In comparison, let’s see what would happen if your stock price was to fall, there are two scenarios. First, if your stock happens to decrease in value, you will be obligated to pay interest for each day that your stock value is below par. In this case, dividend may help; with a high paying dividend you may be able to repay your loan. Secondly, if your stock price was to drop below 50% your stock investment, the broker may ask you to re-establish the margin loan plus the value of the stock (Often referred to as a margin call). Selling your stocks is another option, if you are not able to pay off the loan, keep in mind that your broker may sell your stocks to make up for losses.
For beginners, it may be a good idea to invest in a company with a high dividend payout, so that the stock can eventually pay the margin loan. The margins vary from broker to broker. In order to be secure, be sure to review the terms of agreement contract before signing the dotted line. Now knowing the basics of buying on margin, your consideration of purchasing a margin loan to help fund a stock payment will be based on risk; the amount of risk you are willing to take.