Margin is the money borrowed from a brokerage to execute a trade. It is the difference between the total value of securities held in an investor's account and the loan amount from the broker. Buying on margin is the act of borrowing money to trade securities. The practice includes trading an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or broker. The broker acts as a lender and the securities in the investor's account act as collateral.

 

An Example of Margin

Let's say that you deposit R10,000 in your margin account. Because you put up 50% of the purchase price, this means you have R20,000 worth of buying power. Then, if you buy R5,000 worth of stock, you still have R15,000 in buying power remaining. You have enough cash to cover this transaction and haven't tapped into your margin. You start borrowing the money only when you trade securities worth more than R10,000. 

Note that the buying power of a margin account changes daily depending on the price movement of the marginable securities in the account.

In Summary

• Margin is the money borrowed from a broker to trade a security and is the difference between the total value of the trade 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.

• A margin account is a standard brokerage account in which a trader is allowed to use the current cash or in their account as collateral for a loan.

• Leverage conferred by margin will tend to amplify both gains and losses. In the event of a loss, a margin call may require your broker to liquidate securities without prior consent.

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