Margin trading allows investors to borrow funds from a brokerage firm to purchase securities, using their existing cash or eligible holdings as collateral. This leverage amplifies buying power, enabling investors to take larger positions than would be possible using only their available cash balance.
Leverage & Purchasing Power: Investors can purchase a greater quantity of stock by funding only a fraction of the total purchase price, while borrowing the remainder.
Cost & Interest: The borrowed capital incurs interest over time, which accrues regardless of market performance and reduces net returns.
Approved Securities: Margin loans typically apply only to specific stocks or financial instruments pre-approved by market regulators and the brokerage.
Margin Calls & Liquidation: Investors must maintain a specified minimum equity ratio in their trading account. If market declines cause equity to drop below this threshold, the brokerage issues a margin call requiring additional funds—or forcibly liquidates positions to cover the shortfall.
