What is buying on margin?
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Opening a margin account allows you to trade on borrowed money. You have to open up a margin account when shorting stocks because you’re borrowing the stock rather than purchasing it. In order to maintain a margin account, you must have collateral to assure the broker that he’ll get his money back. Collateral is something (in this case money) that the borrower gives the lender as protection in case he fails to pay back what he owes.
Initial margin: You must keep a minimum amount of your own money in the margin account when you sell the borrowed stock. The usual requirement is 150% of the value of the short sale.
Maintenance margin: This is where the risk comes in. You must also maintain a minimum amount of money in the account depending on the current value of the stock you shorted
As the price goes up, the maintenance margin requirement goes up, and you’ll need to add more and more money to your account. This is known as a margin call.
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