Description
Margin financing allows investors to borrow money from their brokerage firm to leverage for a larger investment position in the market. The investor can potentially gain from both: 1. Higher capital-appreciation gains due to his larger investment exposure; and 2. Higher returns due to positive carry (which is a strategy that involves borrowing money to invest it to make a profit on the difference between the interest paid and the interest earned).
Instrument category
Debt financing
Implementation status
Moderate - tried and tested
Enabling conditions and success factors
- Prudent and active risk management is crucial.
Instrument benefits
- Allows to purchase more shares and potentially earn higher returns without disbursing more cash upfront.
Challenges and risks to implementation
- It increases the risks and potential returns to investors. If prices move against the investor, losses will be magnified by the greater investment exposure.
