Margin

Borrowed money from a broker used to purchase securities, allowing investors to control a larger position than their cash alone would permit.

Margin is essentially a loan from your brokerage, secured by the assets in your account. The Federal Reserve's Regulation T requires investors to put up at least 50% of the purchase price of a security when buying on margin — so with $10,000 in cash you can control up to $20,000 in stock. The securities in your account serve as collateral for the loan.

Trading on margin amplifies both gains and losses. If a $20,000 position (bought with $10,000 cash and $10,000 borrowed) rises 10% to $22,000, your cash profit is $2,000 on a $10,000 investment — a 20% return. But if it falls 10% to $18,000, your loss is $2,000 — also 20% of your cash, not 10%. Losses below the maintenance margin threshold trigger a margin call.

Brokerages charge interest on margin loans, which erodes returns in sideways or slowly rising markets. Professional traders and institutional investors use margin strategically; most retail investors are better served by avoiding it except in specific, well-understood circumstances. Margin is most appropriate for very short holding periods where the cost of borrowing is minimal relative to the expected return.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.