This is money borrowed from a financial institution to buy stocks using existing investments as security. Margin loans, also known as ‘gearing’ or ‘leveraging’, can increase gains on investments. It can also multiply losses.
How it Works
When an investor borrows money to buy shares, the shares purchased with the loan are usually domiciled with the lender as collateral. In the event of default, the shares can be sold to repay the loan.
Advantages
- Can be highly profitable
- Allows investors to take advantage of market opportunities.
- Enhances the ability of the investor to expand investment portfolio.
- Provides ready access to additional funds. The investor does not need to sell existing investments to consolidate debt or make other purchases.
Disadvantages
- Can be a highly risky venture
- Could lead to loss of investment (used as collateral) in the event of default
- Could lead to loss of funds when there is a decrease in share value