Update : Apr. 02, 2001
Margin trading allows investors to sell stocks that they do not actually own; and buy stocks with funds they do not possess. Securities companies lend investors the necessary stocks/funds. Thus, if an investor thinks that XYZ stock is going to increase in value, he can borrow money from the securities company to buy the stock. He then resells the stock later at the higher price, making a profit, and then repays the funds he borrowed. Likewise, if the investor thinks that ABC stock is going to decrease in value, he can borrow the stock from the securities company to sell it at the current price. He then repurchases it at the lower price, making a profit, before returning it to the securities company.