Quick definition Margin is a loan from a broker that allows you to buy more securities than you could with cash alone. You control assets worth more than your deposit. What it is If you have 10,000 dollars and your broker offers 2x margin, you can control 20,000 dollars of assets. You put down 10,000, the broker lends you 10,000. Margin is secured lending. Your positions serve as collateral. If the position value falls below a maintenance level, the broker issues a margin call and demands deposit. Why it matters Margin amplifies both gains and losses. With 2x leverage, a 10 percent gain becomes a 20 percent gain. A 10 percent loss becomes a 20 percent loss. Margin is essential for short selling, derivatives, and many trading strategies. Margin requirements Brokers set margin requirements (how much capital you must deposit). Typical requirements: - Long stocks: 50 percent (2x leverage) - Futures: 5-15 percent (10-20x leverage) - Options: varies by type Higher margin requirements mean less leverage and lower risk of margin call. Margin calls If your account value falls below the maintenance level, the broker issues a margin call. You must deposit more cash or sell positions. If you don't, the broker force-liquidates your positions. Margin calls happen during market stress when prices fall. This can force selling at the worst prices. Interest and fees Brokers charge interest on margin loans. The rate varies by account size and market conditions. During crises, rates can spike, making margin expensive. Practical example You have 10,000 dollars. You buy 20,000 dollars of stock (2x margin). The stock falls 15 percent, costing 3,000 dollars. Your account is now worth 7,000 dollars. Your maintenance requirement is 50 percent of position value, or 5,000 dollars. You have 7,000, so no margin call yet. But if the stock falls another 10 percent, you will receive a margin call. See also - Margin Call - Leverage - Short Sale - Financing Cost
