Margin
Family III · Risk
Not to be confused with leverage, margin call, free margin, margin level.
Margin is the good-faith deposit that a broker requires before it will open a leveraged position on a client's behalf. It is not a fee or a cost of the trade; it is the portion of the trader's own funds that must be set aside as security against the position. The required amount is set by the broker and varies with the instrument, the position size and the applicable regulatory regime.[1]
How margin is calculated
The margin requirement is normally expressed as a percentage of the position's notional value, called the margin rate. The formula is:
Required margin = Notional value × Margin rate
Notional value is the full size of the position, not the amount the trader deposits. A margin rate of 1% therefore means the trader must commit one unit of collateral for every hundred units of exposure. Margin rates differ by asset class and are frequently raised by brokers or regulators during periods of high volatility, so the same position can require more collateral at one time than another.
Worked example
Initial margin and maintenance margin
Two thresholds are usually distinguished. Initial margin is the amount needed to open the position. Maintenance margin is the minimum equity that must remain on the account while the position is open; it is typically lower than the initial requirement. If losses reduce account equity below the maintenance level, the broker may issue a margin call and, failing a deposit, close positions to restore compliance. The exact percentages, and whether a call is issued at all before automatic liquidation, vary between brokers and jurisdictions.
What margin is not
Margin is often confused with the cost of trading. It is neither interest nor commission, although brokers may charge financing on borrowed amounts. It is also distinct from the trader's total account balance: only the required portion is committed, and the remainder stays available. Because margin is collateral rather than a charge, it is returned to the account's available funds when the position is closed, less any loss incurred.
Often confused with
- leverage
- Leverage is the ratio of position size to the trader's own committed funds, while margin is the deposit itself; leverage is expressed as a multiple such as 50:1, whereas margin is expressed as a percentage or a currency amount.
- margin call
- A margin call is a broker's demand for additional funds when equity falls below the required level, whereas margin is the collateral requirement that triggers it; the call is an event, the margin is a standing obligation.
- free margin
- Free margin is the portion of account equity not tied up as collateral, whereas margin is the portion that is tied up; free margin is what remains available to open new positions.
- margin level
- Margin level is the ratio of equity to used margin, expressed as a percentage, whereas margin is an absolute amount of collateral; the level tells you how close the account is to a call, the margin tells you how much is committed.
See also
References
- ↑ European Securities and Markets Authority, product intervention measures on contracts for differences sold to retail clients, 2018 — leverage caps by asset class, margin close-out and negative balance protection; carried into national rules across the EEA thereafter. Applies to clients classified as retail. Professional clients fall outside it.