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Margin trading is a type of secured lending that allows investors to buy stock using borrowed money ¹. It's a risky trading strategy that allows you to use leverage to boost your purchasing power and make larger investments than you could with your own resources. It's also known as buying on margin. Here's how it works:
1. Open a margin account and deposit cash
2. The brokerage lends you money to buy investments
3. The investments you buy serve as collateral for the loan
4. You must deposit a minimum amount to open a margin account
5. You can borrow up to 50% of the purchase price of the securities
6. You must maintain a minimum amount of equity in your account
7. If the value of your securities falls, you may receive a margin call
8. If you don't meet the margin call, your broker can sell your securities without notifying you.
Margin trading can be risky, but it can also be beneficial if used correctly. It's best suited for experienced investors who are comfortable with the risks and understand how to use margin safely. Newer investors are generally better off using a cash account while learning about the financial markets.
