How Traders Can Apply Margin

There are several ways traders can use margin in their trading. Factors for how a trader uses margin include a trader's objectives, risk tolerance, and the products they trade.


Margin is borrowed money that's used to buy stocks or other securities. In margin trading, a brokerage firm lends an approved trader a portion (typically 30% to 50%) of the total purchase price, meaning a trader's buying power increases. Securities in the trader's account act as collateral, and interest is paid on the money borrowed. Because cash and securities in a margin account can act as collateral, some traders choose to use a margin account as a line of credit, designed to have a flexible repayment plan.
Margin loans can serve as a source of flexible borrowing for short-term financial needs, including emergency funding and other personal needs.
This flexible line of credit has a flexible repayment plan, meaning there is no set repayment schedule as long as the required level of equity is held in the trading accounts.
However, there are risks traders should understand so they can make informed trading decisions.
Here we'll discuss the risks of margin loans as well as the ways a trader approved for margin might incorporate a margin loan into their trading strategy.

Risks of margin loans

Margin magnifies both profits and losses, so it's possible for investors to lose more than the initial amount they used to purchase stock or other assets.
This magnifying effect can lead to a margin call when losses exceed a limit set either by a broker or the broker's regulating body. If this happens, the broker will attempt to contact the investor. A margin call1 means the investor needs to provide additional funds immediately to maintain the required minimum. If the margin call is not met within a short time frame—often within a single business day—the position may be liquidated or closed by the broker.
The "maintenance" margin limit may be increased by the broker without prior notice, but it often ranges from 30% to 40%, instead of the initial 50% required at the time of purchase.