Define Margin | Margin Trading | Understanding Leverage

There are three key terms to understand when setting up your first margin trades. Master these terms and learn how to manage your high leverage trading accounts and yields others find impossible become within your reach.

• Initial Margin
• Maintenance Margin
• Margin Call

Initial margin requirement refers to the initial amount of capital a trader must put up in order to take (or buy) a position in a trade. Initial margin varies by broker, country, and security type. A typical initial margin requirement could be as little as 1% (for monetary positions perhaps) of the nominal trade position (how much buying power you will exert) while it can range up to 50% (for equities markets). Initial margin for Treasuries markets tends to be in the 12% range (allowing 8 times initial leverage).

How Much Buying Power Will This Give Me?
In the case where the initial margin requirement is 50%, $1000 of investment capital could be pledged as collateral (which is what you are doing in a margin account transaction) to purchase up to $2000 worth of securities, or 2:1 leverage. The lower the initial margin percent, the higher the leverage ratio.

Once a leveraged position has been established, the trader must maintain a certain amount of equity (the trader's ownership stake of the position) in his account. In MOST cases the maintenance margin is half the rate of the initial margin, ie 25% for equities markets or perhaps as little as 0.25% or less for non-domestic markets.

How Do I Compute My Current Margin Position?
This is simply a matter of computing the remaining equity value of the position in the account and dividing that by the current value of the entire position. If a position was worth $2000 initially (of which $1000 was borrowed at 50% initial margin), if the position falls in value to $1500 then the current margin position is ($1500-$1000 borrowed)/$1500 = 33%

Margin calls: the dreaded event to be avoided at all costs if possible. A margin call is when the equity value in the account falls below the maintenance margin requirement. This is when your broker has the authority to either require you to deposit more cash / collateral, OR (more likely) they will simple begin liquidating your account to protect themselves from losses on the funds you borrowed (which the broker has lent to you).

When Would a Margin Call Occur Based on Our Previous Example?
Basically in the above example if the equity in the account fell to just $333, the total value of the account would be $1333 and the margin position would be $333/$1333 = 25%. If the value of the position falls any further and the maintenance margin on the account is 25%, a margin call will be initiated and the accounts positions will be potentially liquidated at the discretion of the broker.