When you invest "on margin," you borrow money from your broker to make your purchase. Now, your broker may be nice, but he or she isn't going to let you borrow this money for free. You need to pay interest on this loan.

Margin investing can send your profit through the roof; it can also send you to the poorhouse! Let's look at an example to help you understand how it works:

Say you buy 100 shares of Widget at $20 a share. You normally have to pay $2,000. But with a margin loan, you only have to put up $1,000 and your broker loans you the other $1,000.

The next week, the stock rises to $30 a share and you sell. (Wouldn't it be nice if it was that easy?!) You now have $3,000. $1,000 of this money (plus interest and commission) goes to your broker; the rest goes in your pocket.

But what if the stock goes down to $10 a share? You're left with a $1,000 loss and a loan that you must repay.

Investing on margin also has another very hazardous drawback. Before you get your loan, you must put up acceptable collateral - usually your other investments - which the broker can sell if you default on your loan. This is part of any margin agreement, so you must be very careful or you could check your account and find some (or all) of your stocks have been sold.

Buying stocks "on margin" is not for most investors. It's a leveraging technique that significantly raises the risks. We say buy your stocks the old fashioned way - with available cash.

Learn more about smart strategies by visiting these links:

• Your Investing Mantra
• How to Choose the Right Money Market Fund
• Investing with a Broker or Financial Adviser