Investing has its own language. Actually, multiple languages — one for nearly every type of investing. Like margin trading. (Need a definition before all the other definitions? Margin trading is borrowing money to purchase securities.) If you plan to dip a toe in the world of trading on margin, you’re going to hear plenty of terminology. Read on for explanations of the terms you’re bound to come across.
Buying power: Funds that are available to you for purchasing securities. This figure is calculated as the sum of your total market value and your cash balance less the margin requirement. Sometimes called “available margin” or “excess margin.”
Canadian Investment Regulatory Organization (CIRO): Canada’s self-regulatory organization that oversees all investment dealers, mutual fund dealers and trading activity on Canada’s debt and equity marketplaces.
Collateral: The securities held in your margin account are considered collateral (i.e. the securities in your margin account guarantee the loan provided by the broker). If you don’t repay the loan in accordance with the terms and conditions you agreed to, the brokerage can sell your securities and collect the amount owed.
Concentration limits: Limits that restrict the amount you can borrow on an individual security. These limits are set by each broker. They’re intended to safeguard the brokerage from big losses by preventing you from borrowing too much in an individual security (and thus being overconcentrated).
Debit balance: The total amount you have borrowed from the brokerage.
Fully margined: If your margin account is “fully margined” you currently meet all margin requirements and your available margin is equal to or greater than zero.
List of securities eligible for reduced margin (LSERM): A list of securities that qualify for reduced regulatory margin rates. This list sets out the minimum margin rates brokerages can use for a specific set of securities. It’s established by CIRO and published quarterly.
Marginable securities: Securities that can be purchased on margin.
Margin call: A request for funds issued by your broker when your account is under margined (see below). When you receive a margin call, you have to deposit additional funds or margin-eligible securities or close positions in your margin account (i.e. sell your securities to raise your cash balance) to bring your account up to the margin requirement.
Margin rate: A rate that determines the amount a client needs to provide in order to purchase a security. Each security has its own minimum margin rate which is determined by CIRO and is based on various factors. A brokerage can choose to set their own margin rates, called “house margin rates” but they can’t be lower than CIRO’s margin rates.
Margin requirement: The dollar amount you need to personally provide to purchase a security. The margin requirement is determined by the margin rate for the security.
Margin status: The current condition of your margin account, reflecting whether it meets the broker’s requirements for collateral. Your margin status might show that your account is in good standing or needing immediate action (in a margin call).
Max buying power: The funds that are available to you to buy a specific security — which is what differentiates it from buying power, which is not security-specific. The availability of funds is based on your account’s buying power and the margin rate of the security you want to buy.
Net equity: The total value of your margin account. It’s calculated as the value of the assets in your account, minus your cash debit balance (the money you owe to your broker). It reflects what you actually own in the account.
Net loan value: The sum of the loan value for each security held in your account less any amounts owed to your brokerage.
Under equity: If your account is under equity, the value of the securities held in your account as collateral is less than the amount owed to the brokerage. It means that selling all the assets in your account would not cover the outstanding balance, so your loan(s) has become unsecured and your account will be in a margin call.
Under margin: If your account is under margin, it means the value of the securities held in your account as collateral have fallen below the minimum value required by your broker. Your account will be in a margin call.
