margin trading
Practice of buying
stock with
money borrowed from the
broker. In this
arrangement, the
investor makes a
cash down payment (called the
margin) with the broker and can
purchase stocks worth about twice the cash
amount. The broker
charges interest on this
loan (in addition to the
commission on each buy/sell
trade) and the investor has to
keep the entire stockholding with the broker as
collateral. Also, the investor has to put up
additional cash in case the
value of the stockholding
falls below a certain amount. Margin
trading is a double-edged sword - it
cuts both ways. If the
stock price rises, the investor makes twice as much
profit as with his
own cash only. Similarly, if the stock
price falls, the investor
loses twice the amount. In slang, this practice is called '
investing on steroids.'
