What does ''buying on margin'' involve?

Buying on margin involves using borrowed money to purchase securities. This practice allows investors to buy more shares than they could with just their own capital, amplifying their potential returns. However, it also comes with increased risk, as losses can also be magnified if the investment doesn't perform as expected.

Investors typically set up a margin account with a brokerage firm, which allows them to borrow funds for the purchase of stocks or other securities, usually using their existing investments as collateral. The margin requirement is the percentage of the total purchase price that the investor must provide as equity. This strategy can be appealing in a rising market, but in a declining market, it can lead to margin calls, where the investor is required to deposit more money or liquidate assets to cover losses.

The other options do not accurately represent the concept of buying on margin. For example, selling an asset before purchasing it doesn't capture the borrowing aspect of margin trading. Investing in mutual funds specifically doesn't relate to margin purchases, and paying cash for all investments is the opposite of buying on margin, as it implies using only one's own resources without leverage.