Margin trading

In a margin account, a broker lends you money to buy more securities than your own cash would allow. The securities you hold serve as collateral for the loan, and you pay interest on the amount borrowed. Rules set by regulators and by the broker fix how much of your own money you must put up at the start, the initial margin, and the minimum equity you must keep as prices move, the maintenance margin. Your equity is the value of your holdings minus the loan. If it falls below the maintenance level, the broker makes a margin call.

Because the loan stays the same size while your investments rise and fall, margin magnifies the percentage change in your own money. Gains are larger in good times, but so are losses, and interest is payable whatever happens. Losses can be large and can exceed the money you put in: if prices fall far enough, particularly in a sudden drop, you can lose your whole stake and still owe the broker. The broker can also sell your holdings without asking, often at the worst moment. In the UK and Europe, retail investors more often use leverage through CFDs or spread bets than through margin accounts.