Margin

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Borrowed money that is used to purchase securities. This practice is referred to as "buying on margin".

Also, the amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.

- from Investopedia

Alternatively, "margin" is collateral that the holder of a position in securities, options, or futures contracts has to deposit to cover the credit risk of his counterparty (most often his broker). This risk can arise if the holder has done any of the following:

  • borrowed cash from the counterparty to buy securities or options,
  • sold securities or options short, or
  • entered into a futures contract.

The collateral can be in the form of cash or securities, and it is deposited in a margin account. On U.S. futures exchanges, "margin" was formally called performance bond.

- from Wikipedia

Margin trading

Margin trading involves borrowing against securities you already own to purchase additional securities. By leveraging your assets, you can potentially realize greater investment returns.

- from Fidelity

Margin trading risks

Investing on margin isn't necessarily gambling. But you can draw some parallels between margin trading and the casino. Margin is a high-risk strategy that can yield a huge profit if executed correctly. The dark side of margin is that you can lose your shirt and any other assets you're wearing.[1]

Margin accounts

Note that borrowing capital via a margin account incurs interest expenses. In order for a leveraged portfolio to be profitable, the portfolio's returns over the target period must exceed the amount of interest paid to the lender to finance the loaned funds.

Additionally, margin accounts have minimum margin (equity) requirements (usually 30% of the total value of the portfolio's assets, if the portfolio consists entirely of long stock positions). If the account's equity drops below the minimum requirement, the investor faces a margin call: he/she must liquidate assets or add funds to the account until the equity ratio reaches the minimum requirement.

Margin requirements change according to the time of day: regular trading hours versus overnight margin (usually 2x regular trading hours)

A margin call also gives the broker the right to liquidate any or all of the investor's positions, at will and without the investor's approval, until the margin requirement is met. Therefore, unless the investor monitors the account closely, there may be a substantial risk that positions will be liquidated unintentionally, thus realizing unexpected capital gains or losses.

Brokers who offer margin accounts are required to inform investors of their margin requirements and margin rates, and to provide them with standardized materials regarding the risks of buying on margin.[2]

See also

References

  1. Margin Trading: Introduction, a tutorial on margin trading from Investopedia
  2. What is "Leverage"? on the Bogleheads Forum

External links