What is margin in trading? (2024)

What is margin in trading?

Margin in trading is the deposit required to open and maintain a leveraged position using products such as CFDs and spread bets. When trading on margin, you will get full market exposure by putting up just a fraction of a trade’s full value. The amount of margin required will usually be given as a percentage.

There are two types of margin to consider when you’re trading: initial margin and maintenance margin. The initial margin is the deposit required to open the position, often called the deposit margin or just the deposit. Maintenance margin is the money that must be available in your account to fund the present value of the position and cover any running losses.

How does trading on margin work?

Trading on margin works by enabling you to open a position while only committing a fraction of the total cost upfront. The margin is determined by your trading provider’s margin system, and the amount of capital required will depend on the derivative being used and the market being traded. Markets with higher volatility or larger positions may require a bigger deposit. Margin requirements reflect your leverage. For example, if the margin requirement is 5%, the leverage is 20:1, and if the margin requirement is 10%, the leverage is 10:1.

Once you have opened your position, you might need to add more money if your trade starts to incur a loss and your initial margin is no longer enough to keep the position open. If this happens, your provider will place you on margin call, and you’ll be required to top up the funds in your account – this is the additional capital known as maintenance margin.

If you’re ready to start trading on margin, open a live trading account today. You can also create a demo account to see how it works before committing your funds.

Example of buying on margin

Let’s say that you want to buy £1000 worth of shares of company ABC, but you don’t want to put down the full amount. By deciding to trade on margin, you’d only need a fraction of this cost up front to get exposure to £1000 worth of shares. If your trading broker requires, for example, 20% of the position to be put forward as a margin, then the initial amount needed for the trade would be £200 (£1000 x 20%). In this example, your leverage would be 5:1.

Pros and cons of margin in trading

Pros of margin in trading

Margin can magnify your profits, as any gains on your position are calculated from the full exposure of the trade, not just the margin you put up as deposit. Buying on margin means that you have the potential to spread your capital even further, as you can diversify your positions over a wider array of markets.

Cons of margin in trading

Although margin can magnify profits, it can also amplify losses if the market moves against you. This is because your loss is calculated from the full value of the position. However, there are steps that can be taken to mitigate the negative side of margin, such as implementing a risk management strategy.

What to bear in mind before trading on margin

Trading on margin means you only have to put down a deposit to open a position
You could either get your deposit back and make a profit or lose it and make a loss. This will depend on whether the market moves in your favour
The amount of margin you are required to put down depends on the asset being traded, the derivative you choose, as well as the amount of total capital you have available in your account
Because margin increases your exposure, you have more buying power, but this could magnify both your profits and your losses
If your margin deposit has fallen below the minimum requirement, your trading broker may notify you and you will have to fund your account immediately
If you don’t fund your account with a maintenance margin, your positions will be closed, and you will be responsible for the loss (ie you will owe money to your broker)
You can use risk management tools, such as stop-losses, to minimise any risk of experiencing margin call
Always make sure you understand the margin requirements before entering a trade

What margin rates are offered by IG?

IG offers tiered margin rates, which means we apply different margin requirements at different levels of exposure. Our margin rates can range between 3.33% to 50%. If you are a professional client, you will qualify for preferential margin rates as low as 0.45%.

Here, you’ll see an example of margin rates when trading popular forex pairs with IG.

You can see a comprehensive summary of margin rates for our most popular markets here.

How to start trading on margin

To start trading on margin, follow these steps:

Create an IG trading account or log in to your existing account
Choose whether to spread bet or trade CFDs
Search the asset you want to trade and select it
Choose your position size
Click on ‘buy’ or ‘sell’ in the deal ticket and confirm the trade

Note: When you select your position size, your margin will automatically populate at the bottom of the deal ticket.

Open a live account or a demo account today.

FAQs

What is margin in trading? ›

Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of an investment and the loan amount. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.

How does margin work in trading? ›

For example, if you had $5,000 cash in a margin-approved brokerage account, you could buy up to $10,000 worth of marginable stock: You would use your cash to buy the first $5,000 worth, and your brokerage firm would lend you another $5,000 for the rest, with the marginable stock you purchased serving as collateral.

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What does 5% margin mean? ›

Margin trading example

If you were offered 10:1 leverage, or 10% margin, you would be able to trade $200, because every dollar would represent just 10% of the total trade, amounting to $10 with the leverage. If the leverage were 20:1, or 5% margin, you would be able to trade $400 on your $20 investment.

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Is margin trading a good idea? ›

While margin loans can be useful and convenient, they are by no means risk free. Margin borrowing comes with all the hazards that accompany any type of debt — including interest payments and reduced flexibility for future income. The primary dangers of trading on margin are leverage risk and margin call risk.

What is the meaning of margin of trade? ›

Margin trading, a stock market feature, allows investors to purchase more stocks than they can afford. Investors can earn high returns by buying stocks at the marginal price instead of their market price. Your stockbroker will lend you money to buy the stocks, and like any other loan, will charge an interest rate.

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Is 20% margin too much? ›

As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. But a one-size-fits-all approach isn't the best way to set goals for your business profitability.

What is 30 margin on $100? ›

For instance, a 30% profit margin means there is $30 of net income for every $100 of revenue.

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What happens if you lose margin money? ›

If an account loses too much money due to underperforming investments, the broker will issue a margin call, demanding that you deposit more funds or sell off some or all of the holdings in your account to pay down the margin loan.

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Should beginners trade on margin? ›

The Bottom Line. Day trading on margin is a risky exercise and should not be tried by novices. People who have experience in day trading also need to be careful when using margin for the same.

How much money do you need to trade on margin? ›

To purchase a security on margin, FINRA (a government-authorized regulator of brokerage firms) requires that you have at least $2,000 or 100% of the security's purchase price (whichever value is less) deposited into your account.

What is an example of margin trading? ›

Suppose an investor wants to buy shares worth Rs. 1,00,000 but he doesn't have the entire amount. However, he can pay a portion of the total amount for buying the shares. This amount is the margin.

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What is an example of a margin? ›

For example, if a company sells t-shirts, its gross profit would be how much it made from selling the shirts minus how much the company paid for the shirts. The margin is the gross profit divided by the total revenue, which creates a ratio. You can then multiply by 100 to make a percentage.

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Is 5% profit margin good? ›

You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.

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How do you calculate 5% margin? ›

To calculate your margin, use this formula:

Find your gross profit. Again, to do this you minus your cost from your price.
Divide your gross profit by your price. You'll then have your margin. Again, to turn it into a percentage, simply multiply it by 100 and that's your margin %.

Oct 26, 2017

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What is a 5X margin profit? ›

A 5X margin means you can take a position worth five times the amount of money you have in your trading account when intraday trading. For instance, if you possess Rs. 10,000, a 5x margin allows you to trade as if you had Rs. 50,000.

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What does 5% margin mean forex? ›

So, if the forex margin is 3.3%, then the leverage available from the broker is 30:1. If the forex margin is 5%, then the leverage available from the broker is 20:1. A forex margin of 10% equates to a leverage of 10:1.

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