What is ‘margin trading’?

Margin trading refers to the practice where an investor borrows funds from a broker to purchase financial assets, using their existing assets as collateral. This method allows traders to leverage their investments, meaning they can buy more securities than they could using just their own funds. The borrowed funds amplify both potential returns and associated risks; if the value of the assets increases, the investor profits more. Conversely, if the value declines, losses can also be magnified.

Using margin involves a margin account, where the investor must maintain a minimum level of equity. This system enables traders to take advantage of price movements in the market, but it also requires a full understanding of the risks involved, including margin calls, which occur when an investor's equity falls below the required threshold.

The other options do not accurately define margin trading. Trading without a broker is simply executing trades directly, and investing solely in government bonds doesn't involve borrowing funds for trading. High-frequency trading focuses on making numerous transactions in short time frames but is not synonymous with margin trading.