In the instance of margin buying he buyer is unable to afford the price of a stock and therefore borrows money to purchase the stock at a low price, hoping the stock will rise. If the margin buying process is successful, the buyer is able to repay the loan, plus interest while making a profit. However, if the stock does not rise and the buyer loses money, they have low stocks and must repay the loan with interest – therefore losing money.
In the United States, the requirements for margin buying state that the buyer must be able to put up half of the loan, therefore, if the loan is being obtained for $2,500.00 than the buyer must be able to provide $1,250.00.
When buying with a margin, there are a limited number of stocks that can be purchased to a maximum that is different with every company.
In the past, before the stock market crash of 1929, buyers were able to buy with a margin while putting up as little as ten percent of the total value of the stocks. At this time, grace periods and short margins allowed the buyer to purchase stocks without actually paying for the stocks. This caused many problems in the long run with lost money.