In the most basic definition, margin trading occurs when an investor borrows money to pay for stocks. Typically, the way it works is your brokerage lends money to you at relatively low rates. In effect, this gives you more buying power for stocks—or other eligible securities—than your cash alone would provide. Margin trading involves borrowing funds to buy stocks, bonds or other financial instruments. Like any investment, it involves risks and rewards. The risk is that you might borrow money on a company whose stock price collapses. Dividend stocks have the same potential to make money for investors by rising in value over time. As with any other stock, you can make money by buying at a low price and selling for a higher price. By buying stocks the day before the ex-date each day, theoretically he or she could capture a dividend every trading day of the year in this manner. Obviously, this could lead to big profits if the dividend payouts are reasonably high. For this reason, margin trading can be a good consideration for conservative investors if the stock pays a high dividend. Many times, a high dividend from $5,000 worth of stock can exceed the margin interest you have to pay from the $2,500 (50 percent) you borrow from the broker to buy that stock.
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