Outside of margin lending, the term margin also has other uses in finance. For example, it is used as a catch-all term to refer to various profit margins, such as the gross profit margin, pre-tax profit margin, and net profit margin.
The term is also sometimes used to refer to interest rates or risk premiums. Corporate Finance Institute. Charles Schwab. Merrill, Bank of America. Department of Housing and Urban Development. Consumer Financial Protection Bureau. Risk Management. Portfolio Management. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads.
Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. What Is Margin? Key Takeaways 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. A margin account is a standard brokerage account in which an investor is allowed to use the current cash or securities 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. What does it mean to trade on margin? What is a margin call? What are some other meanings of the term margin? Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. This interest directly reduces your return on investments, increasing the amount your investment needs to earn to break even.
Interest rates can vary substantially between brokerage firms. Remember to carefully consider this expense before opening any margin account. Many firms will not allow you to transfer any securities out of a margin account if the account has an outstanding margin loan. These rules are generally included in your account agreement or a separate margin agreement you signed when opening the margin account.
Ask your current firm to provide and explain these rules to you before initiating a transfer of securities from a margin account. For additional information on account transfers, please read our Investor Bulletin: Transferring Your Investment Account.
Instead of charging for individual transactions, some investment accounts charge an asset-based fee annually, quarterly or monthly equal to a percentage of the market value of the securities in the account. If you use margin to purchase securities in these accounts, remember that the asset-based fee is typically based on the value of all securities in the account and does not account for the debt used to purchase margin securities.
In addition to purchasing securities, some brokers may allow you to use margin loans for a variety of personal or business financial purposes, such as buying real estate, paying off personal credit, or providing capital. These loans are still secured by the securities in your margin account and thus subject to the same risks associated with purchasing securities on margin described above.
The terms and conditions of these loans vary between brokers and are generally specified in the margin agreement. You should carefully consider the margin risks described above as well as any fees which may be associated with these loans before using them for any non-securities purpose. Some margin accounts allow the brokerage firm to lend out securities in the account to a third-party, at any time without notice or compensation to the account holder, if the investor has any outstanding margin loan in the account.
While shares are lent out, you may lose the voting rights associated with those shares. You will still receive a payment for any dividends related to lent out shares. However, since you are not the official holder of the shares, the payment you receive may be taxed differently. Ask your brokerage firm if its margin accounts allow for securities lending, and if so, to explain how it works and may impact the securities in the account.
For additional information on margin rules for day traders, please read our Investor Bulletin: Margin Rules for Day Trading. The Commission has neither approved nor disapproved its content. This Investor Bulletin, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
A lower initial cash investment also gives you the flexibility to diversify into other investments in your trading account, and increased diversification may help provide insulation against risk. The risks and drawbacks should be carefully considered before trading on margin.
Worst-case scenario? Your brokerage may sell all of your shares to fulfill a margin call, meaning a total loss of your initial investment. If this happens, you might need to deposit more money into your account. A margin call i. Brokerages typically require a baseline of 25 percent the industry requirement for a long margin account , meaning you must have at least 25 percent equity of the total market value of the securities in your account.
Ally Invest has a minimum maintenance level of 30 percent, but some firms have a threshold as high as 40 percent. The possibility of losing money quickly as a result of a margin call makes margin trading something to consider carefully. Margin borrowing is something self-directed traders might be inclined to do, but it may not be the best choice if you are a newer investor or rely on specialists to manage your investment portfolio for you.
It may help you capitalize on short-term stock gains while keeping the amount of margin interest you pay on the borrowed money to a minimum. Second, you might avoid putting all your eggs in one basket. Diversify your margin trades with multiple stocks spread across different sectors or invest in exchange-traded funds or mutual funds that offer streamlined diversification.
You might even consider investing in forex trading as part of a margin account. Last and perhaps most importantly, think about having a margin trading strategy that acknowledges your risk tolerance. It might be helpful to establish your personal tipping point for acceptable losses and consider setting a higher maintenance margin for yourself to avoid margin calls.
And maybe keep additional cash or liquid investments in reserve to handle margin calls and monitor your account regularly for potential trouble spots. Trading on margin involves risk.
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