Assets, including securities, can be purchased on credit as part of margin trading. It is a form of investments in securities or other assets when the client expects the respective prices to rise. In fact it is a complex operation consisting of a purchase of securities for the client and a loan granted to the client where the loan is secured by the purchased securities.
It is a method generating extreme gains as well as losses thanks to the leverage effect that is typical for margin trading. Any change of the price of stocks multiplies possible gain or loss from the investment. The investor fully participates in gains or losses generated by the trade.
The trader buys securities on credit (borrows money for the investment at a previously agreed interest rate) and the purchased securities are provided as collateral. If the investment goes as planned (the stock price rises), the trader repays the loan and interest and keeps the rest. These trades are particularly used for speculative investments.
Margin trading is not for inexperienced investors.
The investor makes a down payment in the account, for example in the amount of 40% (CZK 400,000). Consequently, he/she buys 10,000 for CZK 100 each. If the price adds 10% the next day (the price hits CZK 110) and the investor decides to sell the shares, he/she receives CZK 1,100,000. After deducting the borrowed money (1,100,000 - 600,000), CZK 500,000 remains in his or her account, which stands for 25% return in one day.*
*The simplified example does not include fees, interest, or income tax.