What is the Margin

What is the Margin?

Posted on

What is the Margin

If you have a standard cash stock account, you know that money should be deposited for the full amount of the position you are trading, or if you have a margin account, for at least half of the position.

This is in contrast to the FX market, where only a small percentage of the actual position value needs to be deposited prior to taking on entering the trade. This small deposit, known as the margin, is not a down payment, but rather a performance bond or good faith deposit to ensure against trading losses. The margin requirement allows traders to hold positions much larger than their account value.

Margin requirements are as low as 1% (and as low as 0.5% on the mini account), meaning for every standard lot size of 100,000 units, you must commit $1,000. However, if you wanted to control a $100,000 in the stock market, you would have to deposit at the very least, $50,000. Even in the futures market, you would have to deposit at least $5,000 to control a $100,000 position.

On your trading station, you can see that there are two types of margin: usable and used. Your used margin is the amount of funds you have committed to existing positions, and your usable margin is the amount of money you have available to commit to new positions. Account equity is your account balance plus or minus any floating profit or loss.

For example, say you open an account with $10,000. At this point your account balance and equity are both $10,000, your usable margin is $10,000 and your used margin is $0, as you have yet to place a trade. Next, you buy 7 lots of USD/JPY, which requires you to maintain $7,000 in equity.

Now your used margin is $7,000 and your usable margin is $3,000. Essentially, this means that you can sustain market losses totaling $3,000 before your account equity falls below the minimum margin requirement of $7,000, at which point the dealing desk will close all open positions. This automatic margin call feature prevents your account from ever reaching a negative account balance.