Buying Stock on Margin. An investor buys stock on margin by borrowing part of the purchase price. The margin requirement is the portion of the price of a stock that cannot be borrowed. The margin requirement is set by the Federal Reserve Board. Today, investors can borrow up to half of the cost of a stock purchase.
Investors purchase stock on margin because they can purchase twice as much stock.
Normally, you buy stocks expecting that they will increase in value and can then be sold at a profit. This procedure is referred to as buying long . To make a profit from a short transaction, the investor must proceed as follows. Arrange to borrow a certain number of shares of a particular stock from a brokerage firm. Sell the borrowed stock immediately, assuming that its price will drop in a reasonably short time.