Opposite of buying outright, in simple terms, it is borrowing to buy stocks. More specifically, it is buying stocks using both an investor’s own money and borrowed amounts. The loan enables the investor to limit the amount of his own money required to buy the stocks to a percentage set by regulations (usually 50% of investment). The leveraged position taken by the investor helps amplify his gains if the stock price increases. In a similar fashion, if the stock price goes down, losses to the investor will also be enlarged. Eventually, the loaned money must be repaid to the broker with any due interest amounts.

The margin percentage in the margin account equals the investor’s equity (own money) as a percentage of the market value of the stocks purchased. In other words, it can be defined by dividing the market value of the stock minus the borrowed funds by the market value of stock. The investor is entitled to withdraw any balance in the margin account above its initial margin. A maintenance margin is always set to insure that the margin account balance never gets negative. In cases the balance becomes negative, the broker send a margin call to the investor for the latter to top up the margin account to its initial level the following day. The extra money deposited by the investor is typically known as a variation margin. The investor must provide the variation margin lest his broker closes out his position.