Definition of margin trading

Also called buying on margin. A method of buying shares that involves borrowing a part of the sum needed from the broker executing the transaction. The collateral for the loan is normally securities in the investor's account. The investor must deposit an initial amount of cash or securities (initial margin or margin requirement) into a margin account with the broker, and must thereafter maintain a minimum amount of cash or securities (margin) in the account as collateral (maintenance margin, minimum maintenance or maintenance requirement). If the balance of a margin account falls below the minimum maintenance amount, the broker makes a margin call to the investor for the funds needed. Margin balances can be adjusted to reflect market values by adding or subtracting variation margins. Buying on margin gives the investor leverage as any capital appreciation or dividend income is on the total amount purchased. Even after the amount borrowed has been repaid to the broker, with interest, the investor could still be better off than if he/she had personally financed the purchase of a smaller amount of shares. That depends on how much the shares gain and how much they yield. Margin trading also carries some risk - if the shares fall in value, the investor suffers a capital loss while also facing potential margin calls from the broker.

FT Articles & Analysis

No articles are associated with this term