Table of Contents
Chapter 1: What is Margin Trading
Chapter 2: Margin Trading Terminology
Chapter 3: When to Use Margin Trading
Chapter 4: Risks Associated with Margin Trading
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Chapter 2: Margin Trading Terminology
– Margin Account
– Margin Interest
– Collateral
– Minimum Margin
– Initial Margin
– Maintenance Margin
– Margin Call
– Buying Power
Chapter 2: Margin Trading Terminology
Make yourself familiar with the terms below because they are used often in the margin trading world.
- Margin Account
- The investor will need a margin account to carry out these kinds of investments. A cash account with a broker where you can only use your own money to buy stocks in the traditional way cannot be used to buy on margin.
- Margin Interest
- Interest payments accrue on the margin amount until the investor pays the loan back. There may be other fees and charges too depending on the terms and conditions of your brokerage account.
- Collateral
- The marginable securities are the collateral on which the broker’s loan is based. These securities are at risk when you buy on margin.
- Minimum Margin
- This is the initial amount you are required to deposit into your margin account to begin trading. Typically, a minimum of $2,000 is required, though brokers can use their discretion to raise this amount.
- Initial Margin
- The Federal Reserve requires investors to put at least 50% initial deposit before they make a margin trade. This means that if you need to buy stocks worth $10,000 on margin, you will need to deposit $5,000 into your margin account and you can get the remaining $5,000 from your broker. Again, brokerages may have their own additional requirements.
- Maintenance Margin
- Maintenance margin is the balance that you need to maintain in your margin account. If your account falls below this level, you need to deposit more funds into the account or sell the underlying stocks to raise funds. The Federal Reserve requires that investors keep a minimum 25% maintenance margin in their accounts.
- Margin Call
- When the broker asks you to sell your stocks to bring your maintenance margin up to the required level, it is referred to as a margin call. Remember, the marginable stocks are the collateral for your broker’s loan and he can sell them in the market to fulfill your debt obligation, sometimes even without your consent.
- Buying Power
- Buying power is the actual amount you can invest. It is the sum of your funds and the broker’s margin. In the example, your buying power went up to $1,000 after you decided to buy the stock on margin.
Next Chapter: When to Use Margin Trading