Margin Trading

What does margin trading mean?

It refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker. It is very risky and almost never recommended.

The use of margin in trading is a way to add leverage to a trade. For example, if you wish to buy $10,000 of an asset and the broker requires 20% margin you only need to put up $2,000 and will borrow the other $8,000 from the broker. In effect this gives you 5x leverage for the trade. This can be great if the price increases as your profits are greatly magnified. It can also be disastrous if the price falls, especially if it falls so much that the broker issues a margin call, in which case he can simply liquidate the trade at the current market price. You take the loss and most likely all of the capital you placed on the trade is gone – and perhaps more. This is why trading on margin is rarely recommended, especially for new traders.