Suppose you want to buy 100 shares of a security and you don’t have enough money to buy the stock, then if you qualify, your brokerage firm will lend you up to half of the amount that is required to purchase the securities that you desire.

Suppose the value of 100 shares is $5000, the brokerage firm lends you $2500 and you invest $2500 and purchase the stock.

Remember the money lent for buy on margin does not come for free, it comes with an interest. The company will also be holding the full stock (100 shares) you have purchased as collateral.

Buy on margin allows you to buy twice the number of shares that you can actually afford to buy.  When the price of the stock increases it can be profitable, but when it decreases the investor is at huge risk.  The brokerage firm holding the collateral, benefits in either way because they loose nothing.