How markets work
Margin
Borrowing from your broker to buy more than your cash allows, using your portfolio as collateral.
How it works
Margin magnifies both directions. Borrowing to double your exposure doubles your gains and your losses, and you pay interest on the loan whichever way the market goes.
The broker sets a maintenance requirement — a minimum level of equity in the account. Fall below it and you receive a margin call, and if you do not meet it the broker sells your holdings for you.
Where it misleads people
Forced selling happens at the worst possible price, because margin calls cluster in exactly the conditions that caused them. Leverage does not just increase risk; it removes your ability to wait.
Worked example
With $10,000 of cash and $10,000 borrowed, a 20% fall in a $20,000 portfolio costs $4,000 — 40% of your own money, not 20%.
Related terms
- Margin callA demand from your broker to add cash or sell holdings, because your account equity has fallen too low.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
- Short sellingBorrowing a security, selling it, and hoping to buy it back cheaper before returning it.
- Limited liabilityThe rule that a shareholder can lose what they invested and no more, whatever the company owes.
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