Had the investor not invested on margin, they would have been better off, as a 20% drop in the portfolio's value would have left them with $80,000.As you can see, margin essentially acts as an amplifier by increasing the size of your trading account's gains and losses. Your goal when making a trade on margin is to profit by more than the relatively small interest cost, thereby boosting the returns you can earn with the original savings you contributed to the account.In the default Investopedia Game provided in our Simulator, players are allowed to trade on margin, meaning they can spend more money buying stock than they have cash in their account. It is also important to consider the risk of receiving a margin call when your brokerage requires you to either contribute additional funds to your margin account or sell your investments to ensure you will not lose their money.
Margin calls occur when your portfolio loses enough money to cause your equity value to be less than your brokerage's margin requirement, and if you don't have the extra money, you'll end up being forced to sell your stocks if they fall too much!For the simulator, the amount of margin that you have available is incorporated in the "buying power" section of the portfolio summary page. The opportunities that margin trading provides can be easily seen with this example portfolio. Note that you don't tap into your margin in the simulator until you have used up your entire cash balance like the example portfolio shown above. Once you start buying via margin, your buying power value will start falling and your cash account value will drop into the negative values (to denote that you now owe money).
The brokerage firm's money they invested with on margin helped the investor earn extra returns for their own pocket!
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