Magnified losses. Margin trading can increase gains but also increases losses, which can exceed the original investment. Losses are based on the full leveraged position, not just the investor’s cash. In volatile markets, this can quickly wipe out the account’s value.
Margin calls. If the equity in a margin account drops below the brokerage’s required level, a margin call is issued. The investor must add funds or sell holdings to cover the shortfall, and if they fail to do so, the brokerage may sell assets at unfavorable prices, causing more losses.
Interest costs. Borrowing on margin incurs interest charges, which can reduce profits as well as increase losses. Interest rates vary by brokerage and market conditions, and the cost can become significant, particularly for positions held long-term or during rising interest rate environments.
Market volatility. Leveraged investments are highly affected by market fluctuations, with rapid price changes posing risks. Volatility can lead to margin calls or large losses, and sudden market downturns may quickly deplete capital, even for well-planned trades.
Emotional and psychological pressure. The higher risks and rapid losses in margin trading can cause emotional stress, leading to impulsive decisions and poor outcomes. Handling leveraged positions during market pressure is difficult, even for experienced investors.