Margin

DEFINITION of Margin

Margin is collateral that the holder of a financial instrument has to deposit with a counterparty to cover some or all of the credit risk the holder poses for the counterparty.

WHAT IT IS IN ESSENCE

This risk can arise if the holder has done any of this, for instance:

  • Borrowed cash from the counterparty to buy financial instruments,
  • Borrowed financial instruments to sell them short,
  • Entered into a derivative contract.

In trading, as always, it is the funds required to open and maintain a leveraged position.

However, providers of that trading will only ask for a portion of the full value of a position in order to open that position.

The amount will usually be given as a percentage of the full value of the trade.

For instance, you wanted to purchase $1,000 worth of XYZ shares and your provider required 10% of the position to be put forward as a margin.

The initial amount for the trade would be $100. This is known as the deposit margin.

HOW TO USE

In trading, it is the funds for open and to maintain a leveraged position.

Providers that offer margin trading will only ask for a portion of the full value of a position in order for that position to be opened. The amount of deposit will usually be given as a percentage of the full value of the trade.

For instance, you wanted to purchase $1,000 worth of XYZ shares and your provider required 10% of the position to be put forward as a margin. The initial amount needed for the trade would be $100. This is known as the deposit margin.

But, if your trade begins to make a loss, your deposit may no longer be enough to keep the position open. On the other hand, it needs to keep a position open and it is the maintenance margin.

At this moment, your provider will ask you to top up the funds in your account. Hence, this is a call.