Why do investors use margin trading

The most significant advantage of margin trading is that it can amplify your returns on investment.

Suppose you have $10,000 in cash, and the market price of a stock is $100, with a margin requirement of 50%. You can first buy 100 shares with your own cash, and borrow $10,000 from Your broker to buy another 100 shares. The shares you previously bought will be used as collateral.

Now you hold 200 shares ($100 per share) through margin trading, and the market value of your position is $20,000. If the stock price goes up by 50% to $150, the market value of your position becomes $30,000. While you owe Your broker $10,000, your net assets become $20,000.

Short selling is a strategy commonly used when you believe the price of a stock is about to fall. You borrow the stock from your broker and resell it on the market. When the stock price falls, you buy back the stock and return it to your broker, and earn the spread as your return.

Suppose the market price of a stock is $100 per share, and you think the stock price will fall in the future. You borrow 100 shares of the stock from a broker and sell them. Now you have $10,000 in cash after the sale, but the number of shares you hold becomes -100. When the stock price drops to $50, you only need to spend $5,000 to buy 100 shares and return them to your broker. The $5,000 spread is your return on short selling.