Margin

Margin is money you put up as a deposit so that you can borrow from your broker or open a leveraged position. In a stock margin account, margin lets you buy more shares than your cash alone would allow. In futures, forex, CFDs and crypto derivatives, margin is the collateral that backs your position. In both cases, if losses eat into your deposit, you may be asked to add money or have positions closed. That request is a margin call.

Two meanings of margin#

Stock margin in the United States#

Under the Federal Reserve's Regulation T, you can generally borrow up to 50% of the purchase price of eligible stocks, so $10,000 of your own money can buy up to $20,000 of stock. That 50% is the initial margin. FINRA rules then require you to keep at least 25% equity in the account at all times, the maintenance margin, and many brokers set higher levels, often 30% to 40% or more for volatile stocks.

You also pay interest on the borrowed amount, which can be significant for positions held for months.

Margin for futures and other derivatives#

For leveraged derivatives, margin is set as a fraction of the position's value:

• Initial margin is what you need to open the position.
• Maintenance margin is the minimum you must keep. Drop below it and you must top up.

Futures accounts are settled every day, so gains are added and losses deducted from your cash each evening. See Futures Margin: Initial and Maintenance and Mark-to-Market. Forex and CFD brokers express margin as a percentage or a leverage ratio, such as 3.33% margin for 30:1 leverage. See Leverage and Margin in Forex.

What happens in a margin call#

1. Your account equity falls below the maintenance requirement.
2. The broker notifies you, sometimes with a short deadline.
3. You deposit funds, close positions or both.
4. If you do not act in time, or if markets move fast, the broker can sell your positions without asking you, at whatever price is available.

In fast markets, many brokers and crypto exchanges liquidate positions automatically the moment margin runs out. See Liquidations in Crypto.

How to avoid margin trouble#

• Use far less than the maximum. Keep a large cushion between your equity and the maintenance level.
• Size positions from risk, not from available buying power. See Position Sizing.
• Use stop losses so losses are taken by your plan, not by a forced liquidation.
• Watch concentration. One volatile stock on margin can trigger a call by itself.
• Know your broker's rules, including higher requirements for volatile or low priced stocks and changes around major events.

Frequently asked questions#

Is trading on margin a good idea?#

For most beginners, no. Margin magnifies losses, adds interest costs and can force sales at the worst time. Experienced traders use it sparingly with strict risk rules.

What is the difference between margin and leverage?#

Margin is the deposit you put up; leverage is the ratio of your position size to that deposit. Lower margin requirements mean higher available leverage.

Can a broker sell my shares without telling me?#

Yes. Margin agreements generally allow brokers to sell securities to meet a margin call, and they may do so without prior notice in fast markets.

Sources#

• FINRA, Margin accounts
• U.S. Securities and Exchange Commission, Margin