Margin Trading
Buying securities using funds borrowed from a broker, allowing investors to control larger positions than their cash balance alone would permit.
What is Margin Trading?
Margin trading involves borrowing money from a brokerage to purchase securities, with the investor's existing portfolio serving as collateral for the loan. The Federal Reserve's Regulation T requires investors to deposit at least 50% of the purchase price in cash (the initial margin), while FINRA rules require maintaining at least 25% equity — though brokers typically enforce stricter requirements. Margin amplifies both gains and losses: a 10% gain on a position bought with 50% margin translates into a 20% return on the investor's equity, but a 10% loss results in a 20% decline. If the account value falls below the maintenance margin requirement, the broker issues a margin call, requiring the investor to deposit additional funds or sell positions immediately.
Example
An investor deposits $25,000 and borrows another $25,000 on margin to buy $50,000 worth of stocks. If the portfolio rises 20% to $60,000, the investor repays the $25,000 loan and keeps $35,000 — an 40% return on the original $25,000 cash deposit. If instead the portfolio falls 30% to $35,000, after repaying the $25,000 loan only $10,000 remains — a 60% loss on the original equity, demonstrating margin's ability to amplify losses severely.