A Margin trading account allows an investor to use the current funds in their account as collateral for a loan. To “buy/trade on margin” means to use money borrowed from a broker to purchase a financial asset.

Traders use margin account to create leverage in the hopes of amplifying gains. Leverage is the increased “trading power” that is available when using a margin account.

Leverage allows you to trade positions “larger” than the amount of money in your trading account and it is expressed as the ratio between the amount of money you really have and the amount of money you can trade.

For instance, if you wanted to trade one standard lot of USD/JPY without margin, you would need $100,000 in your account.

With a margin requirement of only 1%, you would only need to deposit $1,000 in your account. The leverage provided for this trade would be 100:1.

Trading on leverage (conferred by margin) can amplify both gains and losses. Responsible trading is highly advised and only to be used by traders with sufficient knowledge of the financial markets.