What is Margin trading

Margin trading is when you invest in an asset using someone else’s funds, typically a broker. The investment would be made up of the borrowed funds and personal funds. The ratio of collateral to overall investment is referred to as margin and its inverse is the leverage. For example, if you put down $1 as collateral and top it off with $9 of borrowed funds, your margin would be 1:10 and your leverage would be 10x. This is done to amplify profits over an investment. However, this strategy should be practiced with care and only by investing experts as it is considered quite risky.

The personal funds of the investors would make up the collateral. If the asset’s price goes down and the investor fails to provide additional funds, the collateral would be liquidated by the brokerage to retrieve the investment losses. This is called forced liquidation.