Margin

Definition:

Margin buying is buying securities/stocks with money borrowed from a broker. Since this money is borrowed, you can multiply profits or losses made on the securities. The stocks/securities are used as collateral for the loan.

Margin Explanation:

The broker will have a set minimum margin requirement (or initial margin) which is the maximum percent of the investment that can be paid for with borrowed money. A Margin Call is when the value of your investment drops your equity in the investment below the requirements of the broker at which time you have to add more money to your account or sell the security. Initial requirements as well as maintenance requirements are set by various governing bodies including the federal reserve.

Example:

Let’s say you want to short a stock. Unlike buying a stock, your losses are nearly limitless. When you buy a stock the most you can lose is the money you investing, so if you buy a 10$ stock you can lose at most 10$. If you short a stock at 10$ and the stock price goes to 100$ you will end up losing 90$!. That is the purpose of margin, not only to provide leverage but to ensure that you do not lose large sums of money and then default on your broker.

Note:Our system does not use margin so be careful when shorting.

Comments are closed.