What is Margin Trading?
Margin trading is using borrowed money from your broker to buy securities, amplifying both potential gains and losses. The securities in your account serve as collateral for the loan.
Margin Trading Explained
Margin gives you buying power beyond your cash balance but introduces the risk of margin calls. If your account equity falls below the maintenance margin requirement (typically 25-30%), your broker can sell your positions without your consent. Margin amplifies losses just as much as gains, making risk management even more critical.
Real-World Example
With $10,000 in your account and 2:1 margin, you can buy $20,000 worth of stock. If the stock drops 25%, your $20,000 position is now worth $15,000. Your equity is $5,000 (below the 30% maintenance margin of $4,500 on $15,000). Your broker issues a margin call — deposit more cash or they'll sell your position.
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