Buying on margin refers to borrowing funds to purchase securities, with the securities themselves serving as collateral for the borrowed funds.

Margin trading increases an investor’s purchasing power, allowing them to buy a larger quantity of securities without paying the full value from their own capital. The investor remains liable for interest charges and any applicable fees.

While margin trading can amplify profits when security prices rise, it also exposes the investor to larger losses when prices fall.

• An investor who expects prices to rise, anticipates future income, or believes current income sources are sufficient to repay the loan or cover financing costs may buy securities worth up to twice the deposited amount, potentially increasing profits.
• Key risks include:
  • The possibility of losses exceeding the investor’s initial equity.
  • The obligation to deposit additional funds or securities in response to a margin call from the brokerage firm.
  • If the investor fails to meet margin requirements, the brokerage may liquidate part or all holdings without prior consent.
  • Increased market activity due to margin trading can contribute to systemic pressures during sharp downturns.

• If prices fall and the client cannot provide additional collateral, forced liquidation can result in substantial losses.
• Investors should not expect consistently high returns; margin trading involves volatility and unpredictable risks. A solid understanding of market mechanisms and trading rules is essential.
• Competition exists from other margin traders and institutions seeking similar profits.
• Some securities may qualify as collateral at one time but later become ineligible if they fail to meet exchange or brokerage criteria.
• Funds earmarked for essential needs (e.g., healthcare, education, necessities) should not be used for margin trading or posted as collateral due to its high-risk nature.

The brokerage marks to market margin-purchased securities daily based on their official closing prices.

If the client’s debt exceeds 60% of market value (equities) or 85% (government bonds), the firm issues a margin call, requiring cash repayment or additional collateral.

The firm will liquidate securities and collateral to restore indebtedness to: 50% of market value (equities) or 80% (government bonds) when either of the following occurs:

• The client fails to reduce indebtedness within two business days of notification and does not provide additional collateral.
• The debt ratio reaches 70% (equities) or 90% (government bonds).

Contracts may stipulate lower liquidation thresholds, with client notification as provided in the agreement.

• Investors should carefully review the margin trading agreement before signing, including credit requirements, terms and responsibilities, interest calculation, and how purchased securities are used as collateral.
• The agreement should clearly define the conditions under which the broker may liquidate securities to recover the loan.
• Summary: Margin trading is riskier than cash trading (where the full value is paid upfront). Investors should weigh the risk–return tradeoff in light of their financial circumstances, investment objectives, and risk tolerance before engaging in margin transactions.