Question

How do margin trades magnify both the upside potential and downside risk of an investment portfolio?

Short answer

Margins enhance the speculative capacity of the security.

Step-by-step solution

Definition

The Margin is the net worth of an investor’s account and describes securities purchased with money, partially borrowed from a broker.

Explanation on potentials of margins

The margin is a type of credit that allows the investor to post only a portion of value of security they purchase thereby enhancing their speculative capacity. When the price of the security rises or falls, the gain or loss represents a much higher percentage, relative to the actual money invested.