What is Trading on Margin?

Online trading is a powerful investment tool allowing consumers to become their own personal money manager. Setting up an online trading account is quick and simple with 24/7 access.

However, it is important to realize that online trading occurs with real money and in real time. There are conditions and actions that you may choose to make when redistributing your assets, and one such move may be trading on margin.

Margin Basics

In both real life and online trading scenarios, trading on margin means is borrowing money from a broker to purchase stock, similar to taking a loan that must be repaid regardless of whether the stock increases in value or not.

If you are interested in setting a margin account in conjunction with your online trading account, by law your broker must get your signature, so some snail mail transactions may be required.

Opening a Margin Account

Online trading accounts usually require a minimum balance of $2000 to open a margin account, although some may demand more. Once the account is legally established and opened (a margin account can be part of the standard online trading agreement or it may be necessary to open a separate account), you will be able to borrow up to 50% of the purchase price of the stock value you are interested in buying.

Trading on margin should only be used as a short term strategy because of the costs associated with it. When trading on margin in your online trading account, sometimes the securities in the account are used as collateral and the loan will accrue interest charges.