Buying On Margin

The purchase of an asset by paying the margin and borrowing the balance from a bank or broker. Buying on margin refers to the initial or down payment made to the broker for the asset being purchased. The collateral for the funds being borrowed is the marginable securities in the investor's account. Before buying on margin, an investor needs to open a margin account with the broker. In the U.S., the amount of margin that must be paid for a security is regulated by the Federal Reserve Board.

Based on creditworthiness and other factors, the broker sets the minimum or initial margin and the maintenance margin that must exist in the account before the investor can begin buying on margin. Maintenance margin refers to the minimum amount of money that must exist in the account before the broker forces the investor to deposit more money. Let's say an investor deposits $10,000 and the maintenance margin is 50% ($5,000). As soon as the investor's equity dips so much as a dollar below $5000, the broker may call the investor and demand that he/she deposit additional money to bring the balance back to maintenance margin level.