If you buy 100 shares of IBM for $120/share, and the margin on your account is 50%, the broker will float you an interest-free loan of $6,000, until the price of IBM sufficiently rises to the point where you are willing to sell. You pay the broker back its $6,000, and you enjoy the capital gain.

Question

Quizplus · Accepted Answer

Buying on margin is never interest free. The broker will demand that you pay interest on your loan. If the market price of your 100 shares decreases in value, you may receive a margin call, asking you to make up the loss; if you are unable to make up the loss, the brokerage firm can legally sell your shares to cover your losses.

If You Buy 100 Shares of IBM for $120/share, and the Margin