Margin is borrowed money from a broker used to purchase investments. It lets you buy more than your cash allows. Put up $10,000 and borrow $10,000 from the broker. You now control $20,000 of stock. If the stock rises 10 percent, you gain $2,000 on your $10,000, a 20 percent return. If it falls 10 percent, you lose $2,000, a 20 percent loss. Leverage amplifies both directions.

The broker charges interest on the margin loan. Rates vary but are usually lower than credit card rates because the loan is secured by the securities in the account. The broker can sell those securities if the account value falls below a maintenance requirement. That forced sale is called a margin call. If you cannot add funds, the broker liquidates positions, often at the worst possible time.

Margin trading is regulated. In the United States, the Federal Reserve sets initial margin requirements, typically 50 percent. Brokers set higher maintenance requirements. Margin is not for beginners. The risk of losing more than you invested is real. During sharp market drops, margin calls cascade, forcing selling that drives prices lower. That feedback loop can turn a bad day into a crisis. Used carefully, margin can boost returns. Used recklessly, it can wipe out an account.

Key terms

• Initial margin
• Maintenance margin
• Margin call
• Margin interest
• Leverage ratio