What is 'margin trading'?

Margin trading refers to the practice of borrowing funds from a broker to enable an investor to trade larger amounts than their available capital allows. This process allows traders to leverage their investments, meaning they can buy more securities than they could if they were limited to trading only their own cash. The borrowed funds are referred to as "margin," and they amplify potential gains; however, they also carry the risk of amplified losses.

In essence, if an investor has a margin account, they can place trades that exceed their own invested capital, which can greatly enhance both the investment opportunities and the risks involved. Traders must be mindful of the margin requirements and the potential for a margin call, where they must deposit more funds or sell off assets if their account balance falls below a certain threshold.

This understanding of margin trading is critical for investors, as it can significantly affect their trading strategies and financial outcomes in the market.