Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to normally. To trade on margin, you need a margin account.
- Margin refers to money borrowed from a brokerage to trade securities.
- Margin trading therefore 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.
- A margin account is a standard brokerage account in which an investor is allowed to use the current cash or securities in their account as collateral for a loan.
- The collateralized loan comes with a periodic interest rate that the investor must repay to the broker.
- Leverage conferred by margin will tend to amplify both gains and losses. In the event of a loss, a margin call may require your broker to liquidate securities without prior consent.