Margin

The term "margin" has different meanings as it applies to the stock market. It may refer to the difference between the cost price and the selling price, the difference between the buying and selling prices (also referred to as the spread), or it may refer to a type of loan arrangement between client and broker.,

"Trading on margin" is the purchase of stock with a portion of the funding coming from the investor and the remainder coming on loan from the broker. The effect of buying on margin is to magnify profits and losses. Since the securities purchased serve as the collateral for the loan, if the price of the stock falls precipitously, the broker can sell the stock to recoup losses and the investor is left with nothing. On the other hand, if the stock is sold for a profit, both parties make money.

The unregulated purchase of stock on margin was a major contributing factor of the 1929 Stock Market Crash and consequently such transactions are now heavily monitored and subject to strict guidelines.

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