What is a margin account?

A margin account is specifically designed to allow traders to borrow funds from a brokerage firm, which enables them to open larger positions than they could with just their own capital. This borrowing feature is essential for day traders who aim to leverage their investments and increase potential returns. By using margin, traders can amplify their buying power, which means they can control more shares or contracts with the same amount of money compared to a cash account.

In this context, understanding margin is crucial, as it not only creates opportunities for higher gains but also introduces greater risk, since losses can also be magnified. Therefore, utilizing a margin account requires awareness of the associated leverage and the importance of managing risk effectively.