Margin trading is that the act of borrowing funds from a broker with the aim of investing in financial securities. The purchased stock is collateral for the loan. The primary reason behind borrowing money is to realize more capital to take a position and, by extension, the potential for more profits. Margin trading gives you the ability to enter into positions larger than your account balance.
The cost of the loan differs from one broker to a different . Similarly, margin loan rates vary. They can go as low as 1.6% or as high as 8%. In the US, the margin loan rate is established in line with the federal funds rate, so it varies over time.
On the surface, the practice sounds pretty simple. However, actually, margin trading may be a sophisticated process that carries significant risk. Due to the heightened risks, it requires a special account mentioned as a brokerage account. This is different from the standard brokerage account that the majority people are wont to.
To minimize risks and increase the possibility of realizing gains from margin trading- invest wisely, borrow less than the allowed limit and borrow only for the short term.