# Margin Trading 101: How It Works

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Published on 21 Mar 2020 / In Stock Market

What is margin trading? What is a margin? What is the difference between a cash account and a margin account? In episode #34 of Real World Finance we dive deep into answering these questions! If you are new to trading, don't worry, this video is right up your alley!

So if you’re still with me, lets dive a little deeper, and examine how exactly margin accounts work. So the first step is discovering what leverage ratios your broker will offer you. Some brokerages offer a 1:1 Ratio, some offer a 3 or even 4:1 Ratio, and these ratios vary. In fact in the world of forex trading, it is not uncommon for a brokerage to offer its customers a 1 or 200:1 ratio. All the leverage ratio represents is, how many dollars your broker is willing to loan you for every 1 dollar that you deposit into your account. So if you deposited \$10,000 a 1:1 ratio would mean that your broker would loan you an additional \$10,000, while a 3:1 ratio would mean that your broker would be willing to loan you an additional \$30,000. So the first step is to discover what leverage ratio your broker is willing to offer you. For the sake of simplicity we are going to continue with the 1:1 leverage ratio that we used earlier.

So you now have \$10,000 of your money, and another \$10,000 loaned to you on margin by your broker. The next thing to consider is the margin rate. Like with any loan, the lender expects to be paid interest by the borrower. When trading on margin this interest rate owed to the brokerage is called the “Margin Rate”. So keep in mind that whether you win or lose on an investment, you will still owe interest, because you are using your broker’s money.

So next, let’s talk about the rewards that can come from making a good investment while trading on margin. If you experienced a \$1,000 return on your \$10,000 then you would have experienced a 10% return. But when margin trading if you experience a \$1,000 return on your 10 grand and another \$1,000 return on your borrowed 10 Grand, then you have realized a return of \$2,000! After giving back the borrowed \$10,000 you now have made \$2,000 on your personal \$10,000 investment, meaning that you realized a 20% return instead of the standard 10%. This is the true power of margin trading. You unlock the potential for amazing gains.