Margin - Stock Trader Glossary

Margin is essentially a form of leverage that allows traders to amplify their potential gains (and losses) by using borrowed funds to invest in stocks or other securities. When a trader opens a margin account with a broker, they are essentially borrowing money from the broker to purchase securities. The trader must put up some of their own money as collateral, but the broker provides the rest of the funds needed to complete the purchase.

The margin is the difference between the total value of the securities held in the account and the amount of the loan. For example, if a trader has $10,000 worth of securities in their margin account and they have borrowed $5,000 from their broker, the margin would be $5,000. The trader can use this margin to purchase additional securities, but they will be required to pay interest on the borrowed funds.

While margin trading can increase potential profits, it also carries increased risk. If the securities in the trader's account decline in value, the broker may issue a margin call, requiring the trader to deposit more funds into the account to maintain the required margin level. If the trader is unable to meet the margin call, the broker may sell off some or all of the securities in the account to cover the outstanding loan.

Overall, margin trading can be a useful tool for experienced traders who understand the risks involved and have a solid trading strategy. However, it is generally not recommended for beginners or investors with limited experience, as the potential losses can be significant.