Margin / Margin Trading
Definition
Borrowing money from your broker to buy stocks, amplifying gains and losses. Buy $100k of stocks with $50k of your money and $50k borrowed at 6% interest. A 10% gain equals 20% return on your cash. A 10% loss equals 20% loss on your cash.
Why It Matters
Margin is dangerous for most investors. You can lose more than you invested. A 50% crash wipes you out and you still owe the broker. Margin calls force you to sell at the worst times. Only experienced investors should use margin.
Example
Have $50,000. Borrow $50,000 on margin (2:1), buy $100,000 of stock. Stock rises 20% equals $120,000. Profit equals $20,000 (40% return on your $50k). Stock falls 20% equals $80,000. Loss equals $20,000 (40% loss). Now you owe broker $50k plus interest.