A User’s Guide to Margin
Though margin trading comes with more risk, it also unlocks greater trading power. And with greater trading power comes greater potential returns.
How to trade on margin
Margin lets you borrow money from a broker to trade. You get more bang for your buck(s) if your investments do well — any potential profits, minus interest — but if you take losses, those are amplified too.
Terms you should know
There are lots of words worth knowing if you decide to trade on margin, or just want to sound like a Wall Street trader at parties. Here's a short list, but we also assembled a more detailed handy glossary for you.
Margin maintenance
A term to be familiar with since it’s the minimum amount you need to hold in your margin account to keep your broker happy (and, more importantly, lend you money to buy assets).
Non-registered
There are two types of these accounts - margin and cash. A margin account lets you borrow from brokers to trade on margin, a feature you won’t find in a cash trading account.
Leverage
Leverage is the extra buying power you have thanks to funding a margin account. If you put $500 into a stock buy and your broker adds another $500, you’ve got 2:1 leverage.
Margin call
If your margin falls below the minimum your broker requires, a margin call is their official (and often only) warning: add funds or be forced out of your position.
Some mistakes to avoid
Margin is a powerful trading tool, and that power isn’t to be taken lightly. We’ve compiled some of the silliest ones people make when trading on margin, and how you can plan to avoid them.
Advanced margin strategies
Short-selling
You can earn money using margin to short sell by betting an asset’s price will drop, rather than rise. By selling shares you’ve borrowed from a broker, you could rebuy them at a lower price and pocket the difference. If, in fact, prices drop — you’re on the hook either way.
Margin loan
A margin loan can let you borrow money like a line of credit by using the assets in your margin account as collateral. It has its perks, but also risks that make this loan type better suited to experienced investors.
Options
Trading different types of options can be unlocked with a margin account, but comes with its own additional benefits and risks to keep in mind.
Is margin right for you?
Margin has its risks, and isn’t for everyone, but with the right knowledge in hand, may be useful for your investing strategy.