Risk is the engine of the stock market. Without risk, there would be no way to make money as your stock prices rise.
Of course, the same risk that inflates stock prices one day can deflate them the next. For the average stock market investor, the normal risk of the market is enough to satisfy their financial goals without keeping them up at night. But for high-rolling investors who want to make large amounts of money quickly -- and fully understand the serious risks involved -- nothing beats buying on margin. Buying on margin is borrowing money from your stockbroker to buy stock.
Essentially, it's a loan from your broker [source: Here's an example of how buying on margin works: Your broker can loan you up to 50 percent of the price of a stock. Buying on margin is deeply risky.
You not only have the potential of losing your entire investment plus interest, but losing even more money through something called a margin call. To have a margin account, the Federal Reserve Board requires that you always have enough money in your account to cover the maintenance margin. At a minimum, you must have enough cash equity in your margin account to equal 25 percent of the total price of the stock you own.
If you don't have enough cash in the account, your broker can issue a margin call requiring you to deposit enough money to reach the 25 percent maintenance level. Seems like a great deal, especially if the stock price goes up. In the next section, we'll read the fine print about margin calls and discover why they can be so dangerous to investors.
The Last Jedi' Press Conference. After a horrid day trading stocks, the last words you'd ever want to hear are "margin call" -- especially if you can't pay it. See more investing pictures. How Wine Fraud Works. How much money do people accidentally throw away every year? Is there a dark side to 'doorbuster deals'?More...