No, your brokerage doesn't accept Visa, Mastercard or American Express. In the absence of taking a cash advance and transferring the proceeds to your brokerage account (not a good idea), you can't buy stocks with your credit card. When people refer to buying stocks "on credit," they are actually talking about the practice of margin trading. Because margin trading is an inherently risky proposition, there's no guarantee your brokerage will grant you the privilege.
Request margin trading privileges. If you have online account access, you can generally complete the request online. Otherwise, you can call your brokerage. In either case, your brokerage will ask you a series of questions that assess your experience as an investor. Your brokerage will also run your credit; when you buy stocks on margin, you are using a loan from your brokerage to do so. If you don't pass on one or both counts, your brokerage might deny margin trading capabilities. It will send you a letter detailing why, just like any other creditor does when it turns you down for credit.
Deposit the required funds into your account. Federal regulations require a minimum balance of $2,000 to trade on margin. Some firms ask for more.
Review your purchasing power. Most brokerage accounts list the value of cash and securities in your account as well as your purchasing power when the brokerage factors in the margin value of your account. Margin purchasing power varies from firm to firm. Some firms allow you to borrow up to 50 percent of the cost of marginable securities you wish to buy; others less.
Place an order to buy a stock. If you purchase 100 shares of a $10 stock, the total cost is $1,000. If your brokerage allows you to borrow 50 percent of the purchase price, you'll use $500 of your own cash and a $500 loan from your brokerage. If the stock rises, you keep the profits and your original investment, but you owe your brokerage $500 plus interest. If the stock falls, you lose all or part of your original investment -- depending on the extent of the decline -- plus the amount you borrowed plus interest.
Mind your margin maintenance requirement. Federal law requires you to have "at least 25 percent of the total market value of the securities in your margin account at all times," according to the U.S. Securities and Exchange Commission. Most brokerages use higher maintenance requirements, usually between 30 and 40 percent. For instance, if you have $10,000 worth of securities in your margin account, you would need $4,000 in equity -- cash or securities -- to satisfy a 40 percent margin maintenance requirement. If your account equity falls below that 40 percent threshold, your brokerage can issue a "margin call." In response, you must deposit cash or securities into your account to meet the 40 percent level.
- Consider margin calls a courtesy. Your brokerage does not have to issue one. It can sell securities in your account to achieve the necessary equity level without consulting you first.
- What Does Buying Stock on Margin Mean?
- How to Cash in Your Margin Account
- How do I Compare Stock Brokers?
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- What Is a Bond Margin?
- How to Set Up a Brokerage Account
- How to Calculate the Percentage Return on Investment If You Bought Stock on Margin
- How to Do Online Trading of Shares