Margin in the world of stock trading refers to borrowing money from your broker to buy more stocks than you can afford with your own funds. The margin acts like a loan you receive to increase the potential return on an investment. The stocks you already own serve as collateral for the loan.
However, trading on a margin increases the potential for both profit and loss. It is essential for a trader to understand that if the stocks bought on margin go down in value, the trader will still need to pay back the original loan amount to the broker. Moreover, brokers charge interest on the borrowed money, adding another level of risk.
Margin is an advanced trading strategy and is not recommended for beginners. Trading on margin can lead to significant losses; hence, it’s crucial to have a clear understanding of how it works and the associated risks before getting involved.
