Leverage: A Double-Edged Sword
Margin trading lets you borrow money to buy more stock than you could otherwise afford. It amplifies both gains and losses.
How Margin Works
Brokers lend you money using your existing investments as collateral. You pay interest on the borrowed amount.
Margin Requirements
- Initial Margin: Usually 50% of purchase price
- Maintenance Margin: Minimum equity you must maintain (often 25-30%)
- Margin Call: Required when equity falls below maintenance level
The Risks
If your investment falls, you can lose more than your initial investment. Margin calls can force you to sell at the worst time. Interest costs eat into returns.
When Margin Might Make Sense
Experienced traders sometimes use limited margin for short-term opportunities. Beginners should avoid it entirely.