A third strategy known as leverage can help increase your purchasing power. This is because you spend only a small portion of your own money to make an investment of much greater value. For instance, if you borrow 80% of the cost of your home, you can live in a house of much greater value than you would have been able to purchase otherwise. If you sell the home for more than you borrowed, you could make a profit. However, if its value drops, you could end up losing your investment principal and still be responsible for the amount you borrowed to make the purchase. Depending on how much the asset drops in value and the cost of borrowing, you could end up facing significant losses.
You can also use leverage by purchasing stock on margin, or buying an options contract.
Margin Trading at Scottrade
Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Scottrade's margin agreement, available at scottrade.com or through a Scottrade branch office, contains the Margin Disclosure Statement and information on our lending policies, interest charges and the risks associated with margin accounts.