Trading On Margin Can Be Risky - Here's What To Know Before Using It

What is Margin?

Margin lets investors use debt to gain a greater exposure to underlying assets. Margin can be used with trading stocks, cryptocurrency, options, ETFs and futures.

Risks of Margin

Margin is like many types of debts including mortgages and cars. To use margin, brokers have minimum requirements for this account which usually start at $2,000.

They use this initial funding as collateral for your account. If the account's value fluctuates below the broker’s maintenance margin, then the investor must come up with funds or deposit stocks to meet that amount. If that’s not possible, the broker will start selling shares to meet this requirement often referred to as a margin call.

This concept leads to the biggest risk with margin trading, owing more than the initial investment! Brokers aren’t also required to notify investors with accounts that fail to meet the minimum maintenance margin requirement before selling shares. They also aren’t entitled to give extensions to pay back these amounts.

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