Margin trading
Family X · Account mechanics
Not to be confused with margin, margin call, free margin.
Margin trading lets a trader control a position larger than the cash committed, because the broker lends the difference and holds the account's securities or cash as collateral. The borrowed amount is not free: interest accrues, and the broker can demand more collateral or close positions if equity falls below a required level. Rules on initial margin, maintenance margin and eligible collateral vary by broker, country and regulator.
How the loan is structured
In a margin account, the broker treats the trader's cash and securities as collateral and extends credit for part of the purchase price. The margin is the trader's own contribution; the loan is the remainder. Regulators set minimum initial and maintenance requirements, but brokers may impose stricter ones, so the exact percentages are not universal.
Interest is charged on the borrowed amount, typically calculated daily and debited monthly. The loan is callable: if the account's equity falls below the maintenance requirement, the broker issues a margin call and may liquidate positions without prior notice.
Worked example
A trader buys 100 shares at $50 using 50% initial margin. The broker lends the rest at 8% annual interest. Maintenance margin is 25%.
If the price falls to $33.33, equity equals 25% of the position value and the broker can require additional funds.
Risks and constraints
Leverage magnifies both gains and losses relative to the trader's cash. A price move against the position reduces equity faster than it would in a cash account, and forced liquidation can occur at unfavorable prices. Borrowing costs and margin eligibility rules differ by broker and jurisdiction, so the effective leverage and interest rate are account-specific.
Often confused with
- margin
- Margin is the trader's own equity or the required deposit, while margin trading is the act of borrowing against it; the visible sign is that margin appears as a percentage or dollar amount, not as a trading activity.
- margin call
- A margin call is the broker's demand for additional funds or securities when equity falls below the maintenance requirement, whereas margin trading is the ongoing use of borrowed funds; the visible sign is a notice or deadline from the broker.
- free margin
- Free margin is the equity available to open new positions or withdraw, while margin trading is the overall practice of using leverage; the visible sign is a positive available-funds figure in the account.