Trading on margin means you are actually taking out a loan from your stock broker to pay for a stock. This is a convenient way for you to magnify the power of your investment. It is also a convenient way for your broker to make a loan with a very liquid security as collateral (the stock you are purchasing). An easy way to visualize trading on margin is to think of it as a “mirror” of your own investment - it mimics the return on the money you invested. For instance if you trade on a 50% margin, this means you are buying 50% of your own stock purchase while your broker is loaning you the other 50%. So if you buy 200 shares of a stock on margin, think of it as 100 of the shares are yours and 100 of the shares are your brokers. If the price of the stock goes up and you decide to sell, you keep the capital gains on BOTH INVESTMENTS. If the price of the stock goes down and you are forced to sell, you not only lose your own money but you also need to pay back the broker in full (plus any interest for the amount of the loan).

Margin is expressed as the percentage of the investment which is yours - the equity as a percentage of the value of the shares.  "Initial margin" is the percentage that you put in the investment when you open the position.  The easiest way to understand trading on margin is to draw a “T account” to help illustrate the transaction. If you purchase 200 shares for $10 per share using a 50% initial margin, then on the assets side of the T account, you own 200 shares worth a total of $2000. To determine liabilities, note that you contribute 50% and you borrow the rest - you have a $1000 loan from your broker and $1000 worth of equity that you paid for yourself.

Assets	Liabilities + Equity
200*10=$2000	Loan = 50%*2000=1000 Equity = 50%*2000=1000

The minimum reserve requirement is set by the Federal Reserve and today the initial margin requirement is 50%, but to better illustrate a margin transaction lets use a 70% margin so the amount of equity and the loan funded aren’t identical. So the same transaction of 200 shares for $10 on 70% margin would leave you with 200 shares worth a total of $2000 on the assets side. On the liabilities side you will have a loan for $600 (30%) and $1400 worth of equity (70%) that you paid for yourself. Something to keep in mind is that the percentage talked about when trading on margin is YOUR percentage or amount of equity, not the other way around. For instance when people say “70% margin” they mean the person who purchased stock put in 70% and the broker loaned 30%.

As illustrated above, trading on margin is said to “magnify” your investment because it can increase your gain or loss on a stock. For instance a 50% margin can double your capital gain but it can also double your loss. The less the investor puts in, the more "mirrors" magnify your returns.  The more the investor contributes (the higher the margin), the less returns are magnified. Remember a LARGER margin percent means you are putting in more of your own cash and taking a smaller loan from the broker.