What is margin trading?

Margin trading is a form of borrowing that lets you trade with money you don’t have. For example, if you have $5,000 in your account, if you get approved for margin trading, you could enter trades where you might potentially need to tie up a lot more than $5,000 of capital. Margin trading is a double-edged sword, because it allows you to do trades you otherwise wouldn’t be able to do, but at the same time it exposes you to losses that are larger than the money you have in your account.

The alternative is cash trading where you need cold hard cash in your account to cover any new purchases.  It's kind of like the difference between credit cards vs debit cards. Credit cards (margin trading accounts) allow you to spend more than you actually have, whereas debit cards (cash trading accounts) only let you spend what you actually have.

In order to trade income-generating options spreads, it’s necessary to have margin trading enabled on your account. While this might sound scary, it doesn’t have to be. There is a specific way to handle your option trades so that you do not have to “use” your margin, and that will be covered in Module 6: How To Manage Losing Trades.