One simple definition of trading on margin is the ability to buy substantial quantities of shares of stock which you do not have the cash or collateral to buy outright. It is the concept of leverage – borrowing money from a third party (most often your broker) to buy (or short) stocks, bonds, or foreign currencies which you do not have the money to pay for outright.
Back before options trading began, buying stocks on margin was the only game in town to amplify stock market returns, and played a significant role in the stock market crash of 1929. The crash of the stock market left many people unable to pay for the money they borrowed to invest in the market, causing a series of credit defaults in a domino effect. We’ve seen a similar occurance this past September with the failure of Lehman Brothers. Their default on numerous liability positions caused multiple bank failures around the world and god knows how many margin calls.
I’m not going to yammer on forever about the risks associated with trading on margin because that is covered very nicely elsewhere (such as the linked text above). Leveraged trading of this kind is mostly limited to forex trading accounts and treasuries. I don’t know of anyone specifically who trades in marginable stock securities outside those specific arenas. If you know someone, send them my way, I’d love to talk to them.
Other Posts on the Topic of Trading Leverage:
Binary Option Trades – The Simplest and Shortest Method of Investing
An Option Trading System for Binary Option Traders
Prior Post: Forex Trading for Small Business
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