Margin, in finance, refers to the borrowed funds that an investor uses to purchase securities, such as stocks or bonds. It allows an investor to increase their buying power and potentially amplify their returns, but it also magnifies the potential losses.
When an investor opens a margin account with a broker, they are essentially borrowing money against the value of their existing investments. The margin is the difference between the total value of securities held in the account and the amount borrowed.
Trading on margin involves paying interest on the borrowed amount, and the securities held in the account serve as collateral. If the value of the investments in the account falls below a certain level, the broker may issue a margin call, requiring the investor to deposit more funds or sell some of the securities to cover the debt.
It’s important to note that trading on margin can be risky and is not suitable for all investors. It’s crucial to have a good understanding of the risks involved and to use margin responsibly.