Buying stocks on margin means that you purchase the shares using money borrowed from your broker as well as your own funds. The amount of money you must put up is called the initial margin requirement. Buying stocks on margin and other securities transactions that require borrowing are regulated by the Federal Reserve Board, the Financial Industry Regulatory Authority and securities exchanges like the New York Stock Exchange. Your broker’s rules must meet the minimum standards set by these regulating bodies, but brokers can choose to be more restrictive. To trade on margin, you must sign a margin agreement with your broker that establishes the terms and conditions under which you can borrow money. Read your margin agreement carefully, ask questions and be sure you understand your obligations.
In order to calculate your initial margin requirement, you must multiply your total purchase price by the initial margin requirement percentage.
Increasing Your Risk
Before you buy stocks or any other securities on margin, it's important to be aware that you increase your risk as well as your potential profit. Suppose you buy on 50 percent margin, buying twice as many shares as you could by paying the full cash value. You make twice the money if the stock goes up. However, if the stock falls in price, you lose twice as much. If the price falls too far, your broker will issue a margin call. You must then either deposit additional funds or your broker will liquidate your position in the stock to recover her money.
Opening Margin Account
Open a margin account with your broker and deposit the required minimum margin. The NYSE and other securities exchanges require that you have at least $2,000 in your account or 100 percent of the market value of the stocks you want to buy on margin, whichever is less. For day trading the minimum margin is $25,000. Your broker may set higher minimum margins.
Ask your broker what the house requirement is. Under the Federal Reserve Board’s Regulation T, brokers must require an initial margin of at least 50 percent of the purchase price of the security but may set their own requirements higher. For instance, your broker might require 65 percent initial margin.
Calculate Your Initial Margin Requirement
Multiply the price per share by the number of shares you want to buy to find the total purchase price. Multiply the purchase price by the initial margin requirement percentage. Suppose you want to buy 500 shares of a stock at $40 per share. The purchase price comes to $20,000. If your margin requirement is 65 percent, multiply $20,000 by 65 percent to determine your initial margin requirement of $13,000.