Some real estate investment advisors state that to make money in the real estate market, you should leverage your investment. This means to invest around 10% of your own money and borrow the rest. This expands the capacity you have to invest. The stock market has its own version of leverage. This is known as margin purchasing. Another term is buying stock on margin.

When you buy stock on margin, you are borrowing from the broker. The securities and exchange commission (SEC) and the Federal Government have set rules in relation to margin purchasing. They have stated that you cannot borrow more than 50% of what you actually have in your own investment. That is, if you wanted to purchase $1000 of stock but only had $500, you could borrow the rest. There would be an interest that you would need to pay on the borrowed funds.

There is also a tremendous risk associated with this borrowing. If the price of the stock goes up, you win. When it goes up to your exit point, you can sell the stock, pay off the loan and pocket the difference. The risk comes to play if the price of the stock goes down. You must maintain the 50% ratio. Thus if the value of the investment falls down from the 50% ratio, you are subject to what is known as margin calls. This means the broker requires more funds from you. If you have the funds available, you can cover the margin buy reducing the debt. If you do not have the funds available, you must sell enough of the stock to make up the funds required. Since the forced sell comes when the price of the stock is below your purchase price, you are forced into an investment loss. This can be very heartbreaking. You have the potential to lose a lot of money this way.

The difference between leveraging real estate and leveraging your stock market investments is that if the real estate market goes down, you only have to pay the interest payments and wait. With the stock market margins, you have your margin calls. It is a pretty scary way to go. I know because I have lost a lot of money by purchasing stock on margin. I will not go that way again.

If you choose to buy stock on margin, you need to realize the risks. Make sure you have done all the financial and technical analysis and that you can afford to cover the margin calls if there are any. I would not recommend this for the beginning investor.

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Tags: leverage, margin, real estate, risk, SEC, stock, Stock Market