Borrowing money from a brokerage firm to pay for securities is called buying on margin. Much like taking out a loan, margin trading allows you to buy more stock than you would be able to afford otherwise. To trade on margin, however, you have to open a margin account with a brokerage firm. A margin agreement governs the terms and conditions of your margin account. Specifically, it details how interest on the loan is calculated, how you are expected to repay the amount, and how the securities you purchase serve as collateral for the loan.

Before opening a margin account in your name, your broker is required to obtain your signature. Before signing any margin agreement, however, find out how much notice—if any—your brokerage firm must provide before selling your securities to collect on the loan. The Financial Industry Regulatory Authority and the U.S. Securities and Exchange Commission can be helpful resources about buying stocks on margin.

An initial investment —also known as a minimum margin—is required to open a margin account. While minimum margins vary among brokerage firms, they generally are around $2,000. After setting up the account, you can borrow up to 50 percent of the purchase price of a stock.

Buying stocks on margin, however, can be risky. While it may increase your purchasing power, borrowing money to pay for stocks can lead to substantial monetary losses in a short period of time. For example, if you purchase a stock share for $100 by traditional means and the price drops to $50, you lose 50 percent of your investment. However, if you buy the same stock on margin, you lose 100 percent of your investment, and you still have to pay interest on the loan you used to purchase the stock.