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Buying On Margin

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When investors engage in buying on margin, they borrow money to purchase securities. The first step in buying on margin is to set up a margin account. Investors can borrow up to half the cost of securities while buying on margin. Because brokerages have different rules for buying on margin, investors must pay close attention to margin account agreements. Because of interest payments, buying on margin is typically a short-term technique. While buying on margin, investors must track prices. If margin account equity falls below a pre-set level (i.e. maintenance margin level), a brokerage will issue a margin call. The investor then must liquidate the stock or add cash to the margin account. IPOs and stocks priced below $5 are not securities for which buying on margin is possible. Most retirement accounts do not allow buying on margin. That is because buying on margin can amplify investment returns, but the technique can also create losses greater than the initial investment.

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