Trading on margin means that you’re basically borrowing money from your broker like Robinhood to buy more stock or crypto.
Say you have $1,000 but you want to buy $10,000 worth of Google stock. You can borrow the $9,000 that you don’t have from your broker at a certain interest rate (usually anywhere from 2% - 9% per year).
After buying the $10,000 worth of Google stock, the share price drops by 10%. Your $10,000 is now worth $9,000.
At this time, because you were so highly leveraged, you would receive a margin call from your broker.
A margin call is when a broker asks you to deposit more cash into your account to get to a certain maintenance margin requirement (usually 25% but differs by brokerage).
The 25% maintenance margin requirement means that if your portfolio is now worth $9,000, you need to have $2,250 in equity (money you invested yourself).
If you’re unable to add cash to your account, the broker will sell all your stock to recover the $9,000 they lent you.
In this situation, being highly leveraged, wiped out 100% of your initial $1,000 investment from a 10% drop in Google stock.
For most investors, not using leverage is the right approach. If you are going to borrow on margin, make sure to use a broker with a low interest rate and don’t borrow more than 10-20% of your portfolio.