Margin refers to a trading practice that involves borrowing money from a broker in order to purchase a stock. It also represents the difference between the full value of an investment and the amount that was loaned from the broker.
Basically, margin serves as a means that allows traders to purchase higher quantities of shares than they can afford. To achieve this, traders must first submit a request to their broker to open a margin account and pay a specific upfront fee in cash which is known as the minimum margin. The minimum margin serves to help the broker recover money if the trader places a losing trade.
In its essence, a margin account allows a trader to utilize their account funds and assets as collateral for a loan. The leverage provided by the margin account increases potential risks for both profit and losses.
In some instances where a trader sustains a loss, the brokerage firm may place the trader on a “margin call”, which asks the trader to deposit additional funds or securities to their account to meet the maintenance margin. If the investor fails to do so, the investor will likely be forced to sell assets to meet the margin call.
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