Margin trading

Margin trading is when, typically US, investors put up only a percentage of the cost of an asset they buy.

Margin trading is when, typically US, investors put up only a percentage of the cost of an asset they buy. The balance is borrowed from a broker who charges interest on it and whose collateral is the value of the shares held in the account. This deposit (or 'margin') is held with a broker in what is known as a margin account. The minimum amount that must be held in the margin account is called the margin requirement. Margin accounts are common in the futures and derivatives markets, but are also used in the equity markets.

In rising markets, trading on margin works very well for investors, as it allows them to gain exposure to larger trades by value than they could otherwise (if you need only pay a margin of 10%, £1,000 can give you access to £10,000 of securities, for example). Profits are then highly leveraged. However, as the asset bought on margin is the broker's collateral, if its value starts to decline he will want to reduce the value of the loan outstanding. He will then demand extra money. This demand is known as a 'margin call'.

Note, too, that losses are as leveraged as gains. If you put down £1,000 on £10,000 of stocks and the share price falls 10%, you will have lost all of your money.

Recommended

HubSpot: a tech stock set to tumble
Trading

HubSpot: a tech stock set to tumble

US tech stocks have had a fantastic couple of years. But this year is unlikely to be so bullish for high-fliers that can’t turn big profits.
18 Jan 2022
How my stock trading tips fared in 2021
Trading

How my stock trading tips fared in 2021

Successful bets have included construction group Morgan Sindall and US housebuilder DR Horton
30 Dec 2021
National Express: a stock worth a second ride
Trading

National Express: a stock worth a second ride

Coach company National Express is geographically diverse and cheap. Matthew Partridge picks the best way to play the share price.
19 Dec 2021
JD Wetherspoon: why investors should head to the pub
Trading

JD Wetherspoon: why investors should head to the pub

Pub group JD Wetherspoon is a solid operator, and is due a bounce when the pandemic eases. Matthew Partridge picks the best way to play it.
6 Dec 2021

Most Popular

Five unexpected events that could shock the markets in 2022
Stockmarkets

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022
Tech stocks teeter as US Treasury bond yields rise
Tech stocks

Tech stocks teeter as US Treasury bond yields rise

The realisation that central banks are about to tighten their monetary policies caused a sell-off in the tech-heavy Nasdaq stock index and the biggest…
14 Jan 2022