Video Blog: What Does It Mean When My Broker Says I Should Buy On Margin?
Attorney Jeffrey P. Coleman differentiates between the types of accounts that one can use for investing and explains what it means to “buy on margin”.
You have an opportunity in your investment account: to have two sides of the account. The ‘cash account’ means that you’re using your cash to buy investments, another side of the account (if you authorize it) is a ‘margin account’. This means that you are borrowing from the investments that you have with the brokerage firm.
Now if you use that portion of the account (your margin account) to buy more investments, you are stacking risk on risk. So that if the account goes up, you might gain substantially; but if the account goes down, for every dollar that the account goes down, if you are out on margin for buying those investments, your account could lose two dollars in value.
In fact, when we saw markets moving down substantially, we actually had situations where the clients had to write a check to their stock broker when the case was done.