What Is Margin?
In markets, margin refers to borrowing money from a broker to purchase securities, using the securities themselves as collateral, or to the deposit required to support a leveraged position such as a futures contract or short sale. Buying on margin lets an investor control a larger position than their cash alone would allow.
Note that in accounting, margin means something different, a profitability measure like gross margin or operating margin. In a trading context, margin is always about borrowed money and collateral.
How It Works
In the U.S., initial margin rules generally let investors borrow up to 50% of a stock purchase, so $10,000 of cash can buy $20,000 of stock. Brokers also enforce a maintenance margin, commonly around 25% to 30% equity, below which the account is deficient.
If losses push the investor's equity below the maintenance level, the broker issues a margin call, demanding more cash or securities. If the investor cannot meet it, the broker can sell positions without consent, often at the worst possible time. Investors also pay interest on the borrowed balance, which drags on returns.
Example
Suppose you invest $10,000 of your own cash and borrow $10,000 on margin to buy $20,000 of stock. If the stock rises 20%, the position is worth $24,000; after repaying the $10,000 loan you have $14,000, a 40% gain on your cash, double the stock's return.
If the stock falls 20% instead, the position is worth $16,000 and your equity is just $6,000, a 40% loss, and your equity ratio of 6,000 / 16,000 = 37.5% is drifting toward margin call territory.
Why It Matters
Margin is the plumbing behind most leverage in markets, from retail brokerage accounts to hedge fund prime brokerage and futures clearinghouses. Forced selling from margin calls can accelerate market crashes, which is why regulators monitor system-wide margin debt.
Anyone heading into sales and trading or risk management needs to understand initial versus maintenance margin cold, since these mechanics determine when positions blow up.
