Margin risks

Increased potential loss

Just like the way using margin magnifies your returns, it can also put you under the risk of increased loss. Let’s take a look at an example of margin risks:

Example: You have $20,000 worth of securities bought using $10,000 borrowed and $10,000 in cash. When the value of the securities drops by 25% to $15,000, since the amount you borrowed from your broker stays at $10,000, your equity becomes $5,000. That means your equity drops from $10,000 to $5,000, which is a 50% loss.