Buying on Margin

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What Is Buying on Margin?

Buying on margin means purchasing stock or other securities with only a small percentage of the buyer's own cash, borrowing the remainder from a broker and using the securities as collateral. In the 1920s, investors could buy shares by putting down as little as 10% of the price and borrowing the other 90%. This magnifies returns when prices rise, but it works in reverse when prices fall: a modest decline can wipe out the borrower's stake and trigger a margin call demanding more cash. Widespread, lightly regulated margin buying was a common and risky practice during the run-up to the 1929 stock market crash that began the Great Depression.

Why It Matters

Margin buying matters because it adds leverage to markets, amplifying booms and busts. When prices fell in October 1929, brokers issued margin calls that forced investors to sell shares to cover their loans, and that forced selling drove prices down further in a downward spiral. Losses cascaded because borrowed money had inflated the market on the way up. In response, the Securities Exchange Act of 1934 created the Securities and Exchange Commission and gave the Federal Reserve authority to set margin requirements, limiting how much investors could borrow to buy stock. Understanding margin explains how leverage can turn an ordinary market decline into a self-reinforcing collapse.