What is "margin trading"?

Margin trading refers to the practice of borrowing funds from a brokerage firm to purchase securities, allowing an investor to buy more stock than they could with just their own capital. This strategy enables investors to leverage their investments, which can amplify both potential gains and potential losses, depending on how the securities perform. When an investor uses margin, they typically need to maintain a minimum balance, known as the margin requirement, which is established by both the brokerage and regulatory authorities.

The other choices describe different investment strategies or situations. Investing only with one’s own funds would not involve margin trading, as it does not utilize borrowed money. Cash basis trading means that all transactions are settled using available capital without leveraging borrowed funds. Trading based on insider information raises ethical and legal concerns and is illegal under securities regulations, completely unrelated to margin trading practices. Thus, understanding margin trading is crucial for recognizing how leverage affects investment strategies and the associated risks involved.