Trading Margin

For people who have, for the very first time, encountered the term, we decided to go from the very basics. Margin is the money that is borrowed from a brokerage firm to buy an investment. It is an act of borrowing money, and there is a difference between the total value of securities held in an investor's account and the loan amount from the broker. Buying on margin is a practice with includes the purchase of assets when the buyer has to pay only a fixed percentage of the asset value and borrows the rest of the money from any bank or a brokerage firm. Here, the broker becomes a lender, and the securities purchased by the investor serve as collateral.

Understanding Margin

Margin refers to the total amount of equity an investor is holding in their brokerage account. To margin or to buy on margin, it means that you want to use the money borrowed from a broker to buy off the securities.

The basic requirement to do so requires you to have a margin account. A standard brokerage account does not authorize you to do it. A margin account is a brokerage account in which the broker lends an investor the money to buy more securities than he/she could have bought from the balance available in their account.

Using margin to purchase the securities is effective, like using the current cash or securities that you already have in your account as you are putting them as collateral for a loan from a brokerage firm or a bank. It is a common practice; most importantly, you must know that it is too levied with some periodic rate of interest that a borrower has to pay back. Also, the result of this practice is highly magnified, be it profit or loss.

Despite high-risk margins, the investment can be beneficial in several cases. For example, an investor is anticipating to get a higher rate of return on the investment than that it is paying in interest on the loan.