What is margin?
- Margin is money you borrow from your broker to buy securities, secured by the investments you already own.
- Regulation T caps your initial margin at 50 percent of a purchase, so you can hold twice the position your cash alone allows.
- Maintenance margin is the minimum equity you must keep in the account, and falling below it triggers a margin call.
- Opening a margin account takes at least $2,000, and your broker can demand more than the regulatory floor.
- If you ignore the call, the broker can liquidate your securities, and you can lose more than you deposited.
- Futures and commodities margin is a performance bond set by exchanges, not a broker loan.
What is margin in trading?
Margin is when you borrow money from your broker to buy securities, using your existing investments as collateral. That borrowed money boosts buying power but also means you can lose more than you deposited if the trade goes wrong.
Do not confuse trading margin with profit margin. Profit margin measures what a company keeps from revenue. Trading margin is credit, a loan with your portfolio as the guarantee. Loans get paid back with interest, win or lose.
For the accounting side, see gross-margin and profit-margin, which measure what a company keeps from each dollar of sales. For the safety cushion, see margin-of-safety, where a wide gap between price and value leaves room.
How does buying on margin work?
You open a margin account and deposit your stake, then the broker chips in the difference. Under Regulation T, initial margin is at least 50 percent, so you can hold twice what your cash alone buys.
Once the position is open, the test shifts to maintenance margin. FINRA rules generally require 25 percent of the securities' current value as your own equity. Let that slip, and the account falls into a margin deficiency.
Opening a margin account carries a floor of its own. You generally need $2,000 in cash or eligible securities to start, and your broker can demand more than the 25 percent minimum. House requirements only ever raise that bar, never lower it.
Buying power is the total you can spend, and margin excess is the unused borrowing room left over. It grows as your positions gain value and shrinks when they fall. Spend it all and the next dip pushes you straight into a margin call.
When does a margin call happen?
A margin call is the broker demanding your equity back after your holdings drop. It happens when your account equity falls below the maintenance margin, and it asks you to deposit cash or securities to restore the floor before more damage mounts.
Example: You buy $10,000 of stock with $5,000 cash and a $5,000 loan. The price drops to $6,000. Your equity is $1,000. The maintenance margin requires 25 percent of $6,000, or $1,500. You need $500 more to cover the call.
Cover it with cash or securities, because the clock is short. If you cannot, the broker can liquidate your stocks without asking which ones, a forced sale that locks in loss and may leave you owing the loan plus interest.
What are the risks of trading on margin?
The headline risk is that you can lose more than you deposited. Leverage can amplify a loss just as it amplifies a gain, so a sharp drop does not stop at your stake.
Your account can go negative, the broker can liquidate your collateral, and you still owe what remains of the loan. Margin interest is the quieter cost, charged on whatever you borrow regardless of the outcome.
And marginable securities are a narrower pool than you might think, since some assets cannot be bought on credit at all. Margin is a tool for the disciplined, not a shortcut for the hopeful. See also margin-of-safety.
How does margin apply to short selling and day trading?
A short sale borrows stock from the broker to sell it, betting the price falls, and that also lives inside a margin account. The firm wants extra equity as protection, and a rising price can trigger its own margin call.
Shorting on margin doubles exposure on top of the bet itself. Day traders face the steepest bar. A pattern day trader, someone who executes four or more day trades in five business days, must keep at least $25,000 in your account.
How does margin work for futures and commodities?
Futures margin is not a loan. It is a performance bond you post to guarantee the contract, and exchanges set the amount, not your broker. The sum is usually a small slice of the total value, which is why futures look so cheap to swing.
Commodity positions get marked to market daily, a step called variation margin. Each day the exchange settles your profit or loss in cash, so a futures account can swing hard between sessions even though you never bought anything on credit.
Should you trade on margin?
Treat margin as a loan against your future, not a bonus. Its only honest purpose is to take a trade you are confident in and make its outcome matter more, and confidence is the one thing markets punish hardest.
If you cannot picture the margin call scenario and your answer to it, do not borrow the money. The people who use margin well treat it as one tool among many and keep enough equity to survive drawdowns.
The broker lends you their capital and keeps your securities as collateral, so they are the last to feel the pain, protected by what you pledged. You are the first, because the loss lands on your equity before their loan is touched. See also margin-call.