Margin is subject to different meanings, but in the financial context, it refers to borrowing money from a stock broker to buy a stock and using your investment as collateral. Investors generally use margin to increase their purchasing power so that they can own more stock without fully paying for it. The downside is that margin exposes investors to the potential for higher losses.
If the stock price decreases, substantial losses can mount quickly. For example, let's say the stock you bought for $100alls to $50. If you fully paid for the stock, you'll lose 50 percent of your money. But if you bought on margin, you'll lose 100 percent, and you still must come up with the interest you owe on the loan. The Federal Reserve Board and many self-regulatory organizations (SROs), such as the NYSE and NASD, have rules that govern margin trading. Brokerage firms can establish their own requirements as long as they are at least as restrictive as the Federal Reserve Board and SRO rules.
