What is margin trading?

Margin trading involves borrowing money from a broker to purchase financial assets. This practice allows investors to buy more securities than they could with their available cash alone, thereby increasing their potential returns on investment. When an investor engages in margin trading, they are required to maintain a margin account with the broker and adhere to specific regulations regarding the minimum amount of equity they must keep in the account.

The fundamental appeal of margin trading lies in its potential to amplify gains; however, it also increases the risk, as losses can be magnified just as much. This method of trading is used by those looking to leverage their investments, but it comes accompanied by the responsibility of repaying the borrowed funds, typically along with interest.

The other options reflect different concepts in trading and investing. Using only personal funds suggests a conservative approach to investing, while investing in low-risk securities focuses on preserving capital rather than seeking potentially higher returns through leverage. Lastly, trading without leverage focuses solely on long-term positions, which contrasts significantly with the inherent strategy involved in margin trading, where borrowing is key.