Stocks: Trading on Margin

You can buy just about anything without paying the entire amount up front. Stocks are no different, thanks to buying on margin.

When you buy a stock on margin, you pay for a portion and leverage, or borrow, the rest (up to 50% on an initial investment) from your broker. The upshot on leveraging: When the stock goes up, you make a far greater profit on your initial investment. But when the stock goes down, you may end up owing more than your upfront investment.

Here's how it works: Let's say you want to buy 100 shares in XYZ Co.'s stock at $100. When you buy on margin, you pay $5,000 and your broker lends you the other $5,000. XYZ's stock rises 50% to $150, putting your total investment at $15,000, and you decide to sell. You pay your broker the $5,000 you owe, and you keep the other $10,000 (before commissions and interest paid to the broker). ...